Test 4/23 Flashcards by Kendra Schuster

Ch 10

Charging different market segments different prices for the same product

Price Segmentation

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Ch 10

Practice of buying a product at a low price in order to sell it to others at a higher price

Arbitrage

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Ch 10

A criterion customers must meet to qualify for a lower price

Price Segmentation Fence

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Ch 10

What may serve as a price-segmentation fence?

-A characteristic of the customer

-A characteristic of the purchase can also separate groups of customers

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Ch 10

The best price for those customers who buy larger quantities of a product is often lower than that for those customers who buy smaller quantities of the product

-Seller offers a lower price per unit to the customers who buy larger quantities

-Lower per unit price

Quantity discount

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Ch 10

Important to prevent reselling – patch holes in purchase-quantity fences

Associations between groups of buyers of a product

Purchasing alliances

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Ch 10

Repair the holes in the fences that allow high price segment customers to buy at low price segment prices

Segmentation fence patches

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Ch 10

Two goals of price segmentation fences

Divide the market appropriately
Keep segments separate (i.e. few ‘holes’)

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Ch 10

Common examples of customer characteristics as a price segmentation fence

Age: discounts for children, seniors

Occupation: student discounts

Commercial status: higher periodical subscription prices to libraries

-In consumer products, the perceived fairness of using customer characteristics is an issue

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Ch 10

Four types of quantity discount:

Order-Size Discount
Cumulative Purchase Discount
Fixed Charge Price
Two-Part Pricing

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Ch 10

Gives customers who purchase larger amounts at one time a lower per unit price than those making smaller orders

Order Size Discount

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Ch 10

Gives customers who have made many purchases from the seller a lower price for new purchases than customers who have done less business with that seller

-Often take the form of a frequent-user program

Cumulative Purchase Discount

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Ch 10

Per-portion or per-use price than those who make less use of the product

Gives open access to a product to customers who pay a single price, such as paying one price for a meal in a buffet restaurant

The effect is that customers who make more use of the product pay a lower

Fixed Charge Price

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Ch 10

Involves both a fixed charge and a per-unit charge, such as paying a fixed amount to rent a car plus an additional amount for each mile driven.

These two charges are often set so that customers who buy more units of a product pay less per unit than those who buy fewer units.

Used by retailers which require customers to pay a fixed member fee, or a fixed annual fee.

The more items a customer purchases, the lower the per-item amount of the member or shipping fee.

Two-Part Pricing

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Ch 10

Price segmentation by product features

Feature-dependent premium
Feature-dependent discount

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Ch 10

When customers with higher basic-product best price also choose a product-enhancing feature

High price for desirable feature includes premium for basic product

Feature-Dependent Premium

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Ch 10

When customers with lower basic-product best price also accept a product-diminishing feature

Receive basic-product discount only if diminishing feature is included

Feature-Dependent Discount

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Ch 11

Time of product use or purchase can be an effective price-segmentation fence

Time as a Price-Segmentation Fence

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Ch 11

Prices may vary by time of product use

Peak-load pricing

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Ch 11

Prices May Vary By Time of Product Purchase

Periodic discounts
Early-purchase discounts
Late-purchase discounts

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Ch 11

Setting higher prices during time periods of peak demand

–Ex: higher prices at movie theaters for evening showings

Peak-Load Pricing

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Ch 11

Common in the pricing of service products:

–When there is strong and predictable demand fluctuations
–Service products cannot be stored

Time of use separates customers likely to differ on all three factors that determine best prices:

–Lower VTC during off-peak demand periods
–Lower incremental costs during off-peak periods
–Greater customer price sensitivity during off-peak periods

The differences in these factors favor:
–Price decreases for off-peak periods
–Price increases for peak periods

Peak Load Pricing

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Ch 11

Dangers of using off-peak sales to subsidize capacity costs

Possibility of peak reversal sets limits to off-peak price decreases

Occurs when a lower price in the off-peak period stimulates so much demand that the off-peak times become the peak times.

Peak Reversal

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Ch 11

Relevant costs are higher during peak usage periods

–Peak prices driven by capacity costs

–Off-peak prices driven only by operating costs

Capacity Costs and Operating Costs

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# Ch 11 Periodic discounts communicated by advertising –Common in specialty stores, department stores, supermarkets

High/Low Pricing

# Ch 11 *Assume a market consisting of:* 1. A segment of high best-price customers 2. A segment of low best-price customers -Price high until the time sufficient low-price buyers accumulate *Implementing high/low pricing:* 1. Long time at high price helps create discount frame 2. Some irregularity in timing is desirable Benefits: -Reduced advertising and inventory costs can be passed on to customers

High/Low Pricing

# Ch 11 Consistent prices somewhere between the extremes of high/low -Common among discounters (e.g. Walmart) and ‘category killers’ (e.g. Home Depot, Staples) Benefits: Helps maintain perception of high quality (IRPs) -Creates sense of responsibility, excitement in low best-price segment

Everyday Low Pricing:

# Ch 11 Useful when customers with lower VTC or greater price sensitivity are willing to purchase before other customers Ex: advance-purchase discounts (airlines, hotels) -Revenue management techniques help historical data guide the number of advance-purchase discounts to offer

Advance-Purchase Discount

# Ch 11 Discount for purchasing later than other customers Useful when customers with lower VTC or greater price sensitivity are willing to purchase after other customers Ex: airlines’ standby fares

Late-Purchase Discount

# Ch 11 Reduction in the initial retail price -Often used for merchandise clearance –Items that are slow moving, obsolete, end of season, shopworn, etc. –Accomplishes price segmentation by time of purchase *Currently comprise around 20% of department-store sales*

Retail Markdowns

# Ch 11 Price of an item put on the selling floor is marked down as follows

–After 14 selling days, it marked down 25%. –After 21 days of selling, it marked down 50%. –After 28 selling days, it is marked down 75%. –After 35 days, it is given to charity

# Ch 11 Managing Markdowns

Simple markdown rules, like those used by Filene’s Basement, are unlikely to be profit maximizing -Better to use historical data to estimate expected value of item’s revenue –Applying revenue management techniques to retail merchandising

# Ch 11 Setting a high initial price for a product and lowering it over time Particularly appropriate when product tends to be purchased only once To avoid encouraging buyers to wait for further reductions –Cut price infrequently Make lower-priced models less attractive

Sequential Skimming

# Ch 12 Postage-stamp pricing Appropriate if shipping costs are low But for many industrial products, shipping costs are high

Uniform Delivered Pricing

# Ch 12 Stands for ‘free on board’ Buyer pays shipping costs

FOB Pricing

# Ch 12 Delivered prices do not fully cover shipping costs Effectively lowers product price where competition requires it Avoids having to cut price to local customers

Freight Absorption Pricing

# Ch 12 Retail chains pricing the same item differently in different stores –By property (e.g. shopping centre, office building, hospital, college campus) –By neighbourhood, town, region

Zone Pricing

# Ch 12 Zone Pricing

1. Convenience-based price zones 2. Price-sensitivity factors in price zones

# Ch 12 –Greater convenience gives greater VTC –Also likely to involve higher costs

Convenience-based price zones

# Ch 12 –Income, intensity of competition -Customer’s ability to engage in price information search

Price-sensitivity factors in price zones

# Ch 12 Constraints of Zone Pricing

*Perceived fairness of zone pricing:* –Customers feel cheated if they observe another store in the chain charges less –Tends to create a profit-seeking image *Difficulty of managing price zones:* -May limit e.g. TV price advertising -Could conflict with online pricing

# Ch 12 Buying in one country to sell in another through unauthorized channels Not illegal (‘black’ market), but ethically questionable (‘gray’) Wholesalers buy a product where it is cheap and ‘cross-ship’ it to places where prices are high Makes country of purchase a leaky price-segmentation fence

Gray Market Commerce:

# Ch 12 Managers reduce prices in high-priced countries and raise prices in low-priced countries so as to keep the price differentials for a product close to being within this 20 percent range.

Price Corridor

# Ch 12 How to set prices low enough for customers in developing nations (‘bottom of the pyramid’) *Keep the product’s nominal price low* –Consumable products: single-use package sizes –Durable products: ‘shared-access model’ –Services: automation and telecommunication Very low nominal price, not necessarily very low per-unit price

Nominal Price

# Ch 15 Pricing policy where prices are determined through customer interactions

Interactive Pricing

# Ch 15 Ascending bids from numerous buyers are entertained by the seller. -If the bid prices exceed the seller’s reservation price—the minimum that the seller is willing to receive for the item—then the auctioned item will be sold to the last remaining bidder. -This bidder will pay the highest bid amount

English Auction

# Ch 15 The auctioneer sets a high initial price and starts a clock. -At regular intervals, the price of the item is lowered until the first bid is made, which stops the clock. -The bidder who makes the first bid purchases the item and pays the amount of his or her bid. -The Dutch auction mechanism, also known as a “descending-price auction

Dutch Auction

# Ch 15 All bidders submit bids without any awareness of the bids of others. -Bids are accepted for a specified time period. -At the end of the time period, the bidder who submitted the highest bid purchases the item and pays the amount he or she bid. -Although first-price sealed-bid auctions are sometimes carried out by sellers, this auction mechanism is most often used in auctions carried out by buyers

First-Price Sealed-Bid Auction

# Ch 15 Differs from a first-price sealed-bid auction in only one respect. -The bidder who submits the highest bid purchases the item but pays the price bid by the second highest bidder raised only by the smallest allowable bidding increment.

Second-Price Sealed-Bid Auction

# Ch 15 A bid from one bidder encourages others –Early bids communicate information on product value –A reason for popularity of English auction mechanism

Herd Effect

# Ch 15 Urge to follow through on early bids

Momentum Effect

# Ch 15 Exaggerated desire to win

Bidding Frenzy

# Ch 15 The tendency for a company to win a bid but then lose money on carrying it out

Winner’s Curse

# Ch 15 When to set prices by auction

1. Price-setting by auction 2. Price-setting by negotiation

# Ch 15 –One seller interacts with numerous buyers –One buyer interacts with numerous sellers

Price-setting by auction

# Ch 15 –One-to-one interaction between seller and buyer –Asking price, initial offer, reservation price, haggling –Partial-negotiation policy

Price-setting by negotiation

# Ch 16 Dividing up a fixed pie

Distributive Negotiation

# Ch 16 *Restructuring to achieve win-win – Unbundle subsidiary issues (e.g. delivery time, returns, training) – Consider long-term considerations – Look for value asymmetries

Win-win Negotiation

# Ch 16 Break from fixed prices for customers who want to negotiate – Threatens trust in seller’s fixed-price policy

Partial-Negotiation Policy

# Ch 16 Specifies evidence required for price concession – Can effectively structure partial negotiation

Price Matching Guarantee

# Ch 18 Pricing practices that interfere with this independence -Laws developed against collusive agreements, ‘trusts’

Price Fixing

# Ch 18 Agreements among competitors to set minimum prices, supply restrictions, bid rigging -Explicit horizontal price-fixing collusion -Considered per se violation -Suspicious competitive behaviors Ex: parallel pricing, price signaling –Judged by rule of reason criterion –Presence of plus factors

Horizontal Price Fixing

# Ch 18 In one type of bid rigging scheme, conspiring companies will agree to withhold bids or purposely bid too high in return for having a designated successful bidder subcontracting to them a portion of the work. Colluding bidders could also decide to take turns winning the business, agreeing to throw the bidding first to one of the conspirators, then the next, and so on.

Bid Rigging

# Ch 18 Product’s manufacturer specifying the price that can be charged by resellers -Resale price maintenance -Unilateral actions generally legal *Bilateral contracts now judged by rule of reason* –Encourages resellers to provide full service –Can help small brands and small resellers

Vertical Price Fixing

# Ch 18 Ex: the New Balance company might attempt to require its dealers to maintain the company’s list prices on its shoes and to avoid offering discounts to consumers -By requiring all resellers to maintain a minimum price, the manufacturer reduces price competition and thus protects reseller margins. -Doing this enables the manufacturer to maintain its prices to the resellers and thus also protects the manufacturer’s profits.

Resale Price Maintenance

# Ch 18 There are industries where the government explicitly sanctions a noncompetitive price-setting process -It is usually the case that such industries are considered to be natural monopolies, which are said to exist when the presence of competing sellers creates inefficiencies -Utilities

Natural Monopolies

# Ch 18 The practice of excessively raising prices, often for essential goods and services, during times of crisis or emergency. It's essentially taking advantage of a situation to make a profit at the expense of consumers.

Price Gouging

# Ch 18 Market-based approach, part of what is known as green marketing, involves consumers paying a premium for environmentally friendly products. A key to succeeding in this approach is to ensure consumer awareness of the environmental claim either by the product’s name to bring to mind the company’s contributions or by use of a standard ecolabel

Green Marketing

# Ch 18 The practice of setting prices very low, perhaps even below variable costs, in order to do harm to a competitor is known as predatory pricing. -The logic of predatory pricing is that if a seller sets prices low enough to drive out the seller’s competitors, the resulting monopoly would give the seller the power to charge very high prices that will provide the strategy’s payoff. -Although frustration at low-priced competitors often leads firms to accuse those competitors of predation, it is probably a pricing strategy that is rarely used.

Predatory Pricing

# Ch 18 Higher unit prices for larger package sizes than for smaller ones Misleading merchandising

Quantity Surcharges

# Ch 18 Very low fees or interest rates during a brief introductory period that are more than wiped out by higher prices afterward

Teaser Rates

# Ch 18 Four types of societally questionable pricing practices

1. Prices that are too high 2. Prices that are too low 3. Price segmentation in consumer markets 4.Price segmentation in business markets

# Ch 18 Prices that are too high

–People being unable to afford necessities –Price controls –Laws against price gouging –Pharmaceutical patents

# Ch 18 Prices that are too low

–Facilitating unwholesome demand –Strategy of predatory pricing

# Ch 18 Price segmentation in consumer markets

May lead to negative feelings

# Ch 18 Price segmentation in business markets

*May restrict marketplace competition *Robinson-Patman Act (1936) -Goods of ‘like grade and quality’ -Cost-justification defense -Meeting-competition defense

# Ch 18 Three types of questionable price communication practice

–Manipulation of price formats –Misleading merchandising –Using fictitious low prices as ‘bait’

Test 4/23 Flashcards

(77 cards)