Price Discrimination

Pricing discrimination is also known as price differentiation. It exists when a seller charges different prices
for the same product to different buyers.

Price Discrimination is not always a negative form of discrimination. However, earlier such practices were
prevalent. A black customer was charged more for the same quantity of a product than a white customer.
Today such practices are rare.

There are various degrees of price discrimination. These are first, second and third degree of price
discrimination. For price discrimination to be successful certain conditions must be fulfilled.

The seller (manufacturer, retailer or wholesaler) must have a clear understanding of market segment.
Market segment is a term in economics used to refer to a set of people who have one or more
characteristics in common due to which they demand similar products or services.

The seller should be able to gauge the consumer's elasticity of demand. A buyer who is willing to pay
more for a good or service is said to have a low elasticity of demand. Similarly a more price-sensitive
consumer will not be willing to pay more. He is understood to have a high elasticity of demand.
First Degree Price Discrimination

In this form of price discrimination the manufacturer sells similar goods or services at different prices to
different consumers. For the seller it is difficult to guess which customer will be willing to pay more and
which one will not. But if he can learn this art of trade his profits shall be high. The act of bargaining helps
the seller in understanding his customer's elasticity of demand. An example of first degree price
discrimination can be the selling of new or old cars. A buyer will pay different prices for cars with similar
features. As the customer and seller bargain the seller tries to extract from the buyer the maximum
amount for the product.

Second Degree Price Discrimination

Second degree price discrimination is practiced in certain companies where the manufacturer reduces the
price for his product for a consumer who has ordered for it in bulk quantity. When a product is ordered in
bulk quantity the customer often enjoys discounted rates. However another customer buying the same
product but in smaller quantities does not get it at reduced rates. This form of price discrimination is
common with retailers.

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ans---1111111
Price Discrimination

Most businesses charge different prices to different groups of consumers for what is more or less the
same good or service! This is price discrimination and it has become widespread in nearly every market.
This note looks at variations of price discrimination and evaluates who gains and who loses?

What is price discrimination?

Price discrimination or yield management occurs when a firm charges a different price to different groups
of consumers for an identical good or service, for reasons not associated with costs.

It is important to stress that charging different prices for similar goods is not pure price discrimination.

We must be careful to distinguish between price discrimination and product differentiation – differentiation
of the product gives the supplier greater control over price and the potential to charge consumers a
premium price because of actual or perceived differences in the quality / performance of a good or
service.

What is Blue Ocean Strategy? Ten Key Points

BOS is the result of a decade-long study of 150 strategic moves spanning more than 30 industries over
100 years (1880-2000).
BOS is the simultaneous pursuit of differentiation and low cost.
The aim of BOS is not to out-perform the competition in the existing industry, but to create new market
space or a blue ocean, thereby making the competition irrelevant.
While innovation has been seen as a random/experimental process where entrepreneurs and spin-offs
are the primary drivers – as argued by Schumpeter and his followers – BOS offers systematic and
reproducible methodologies and processes in pursuit of blue oceans by both new and existing firms.
BOS frameworks and tools include: strategy canvas, value curve, four actions framework, six paths, buyer
experience cycle, buyer utility map, and blue ocean idea index.
These frameworks and tools are designed to be visual in order to not only effectively build the collective
wisdom of the company but also allow for effective strategy execution through easy communication.
BOS covers both strategy formulation and strategy execution.
The three key conceptual building blocks of BOS are: value innovation, tipping point leadership, and fair
process.
While competitive strategy is a structuralist theory of strategy where structure shapes strategy, BOS is a
reconstructionist theory of strategy where strategy shapes structure.
As an integrated approach to strategy at the system level, BOS requires organizations to develop and
align the three strategy propositions: value proposition, profit proposition and people proposition.

diseconomies of scale
Definition
Increase in long-term average cost of production as the scale of operations
increases beyond a certain level. This anomaly may be caused by factors
such as (1) over-crowding where men and machines get in each other's
way, (2) greater wastage due to lack of coordination, or (3) a mismatch
between the optimum outputs of different operations. See also economies
of scale.

Diseconomies of scale

A diseconomy of scale is the opposite of an economy of scale. If some cost of a business rises with an
increase in size, by a greater proportion than the increase in size, it is a diseconomy of scale.

A more precise definition is that long run average cost per unit rises with an increase in output.

Diseconomies of scale are rarer than economies of scale and they are often offset by economies of scale
that exist in the same business. This can make it hard to decide which will have more effect.

For example, there is evidence that diseconomies of scale exist in pharmaceutical companies' research
and development. There are undoubtedly economies of scale in manufacturing and marketing. The latter
are also important costs. They will usually outweigh R & D combined, and often alone, but R & D is a
growth driver and its efficiency has a strategic importance they lack.

Causes of diseconomies of scale usually relate to the difficulties of managing a larger organisation. A
larger organisation is harder to monitor, it is more complex and therefore co-ordination between different
departments and divisions becomes more difficult. As well as making management less effective, and
therefore indirectly imposing costs, the systems designed to cope with the extra complexity may also
directly impose costs (that is usually less important as it can be quantified and managed). People working
within a larger organisation may also feel less committed to it.

Diseconomies of scale can also occur for reasons external to a firm. For example, as a business
becomes larger it may put pressure on its supplies of raw materials and labour, raising input prices.

In certain industries, regulation can be tighter on large firms as a result of competition law or industry
specific regulation. Usually, however, there are economies of scale in dealing with regulation - this is one
of the advantages large pub chains have over small chains and (even more) independent pubs.

In general economies of scale are more significant and important for investors, but diseconomies of scale
can occur and are worth considering especially when dramatic expansion or acquisitions are being
considered.

Markup pricing refers to the difference between the cost to produce and market an item
for sale, and the retail price that is charged for that item. Typically, the markup is expressed as a fixed
percentage, and is determined by applying that percentage to the actual cost of the item. There are many
reasons for markups, with the desire to make an equitable amount of profit on each item sold one of the
main considerations.

When determining the market pricing, it is important to know exactly how much it costs to produce each
unit of an item that is manufactured for sale to consumers. In order to determine this figure, it is necessary
to take into consideration the cost of raw materials, the production process itself, administrative and
clerical support, packaging, and shipping costs. This total cost serves as the benchmark of how much
money the business must earn on each item in order to break even.

Transfer pricing is the rates or prices that are utilized when selling goods or
services between company divisions and departments, or between a parent company and a
subsidiary. The transfer pricing that is set for the exchange may be the original purchase
price of the goods in question, or a rate that is reduced due to internal depreciation. When
used properly, transfer pricing can help to more efficiently manage profit and loss ratios
within the company. Generally,transfer pricing is considered to be a relatively simple method
of moving goods and services among the overall corporate family.
Marginal Cost Pricing
In economics, the setting of a price based on the additional cost to a firm of producing one more unit of output (the
marginal cost), rather than the actual average cost per unit (total production costs divided by the total number of units
produced). In this way, the price of an item is kept to a minimum, reflecting only the extra cost of labour and
materials.
Marginal cost pricing may be used by a company during a period of poor sales with the additional sales generated
allowing it to remain operational without a reduction of the labour force. 

 Pricing is the establishing the policy and setting agreed rates for charging customers.

• Pricing is the method adopted by a firm to set its selling price. It usually depends on the firm's
average costs, and on the customer's perceived value of the product in comparison to his or her
perceived value of the competing products. Pricing is one of the four P's of the marketing mix. 

Importance of Pricing
Pricing is very important for the following reasons:
Most Flexible Marketing Mix Variable - For marketers price is the most adjustable of all marketing
decisions. Price can be changed very rapidly. The flexibility of pricing decisions is particularly
important in times when the marketer seeks to quickly stimulate demand or respond to competitor
price actions.
Setting the Right Price - Pricing decisions made hastily without sufficient research, analysis, and
strategic evaluation can lead to the marketing organization losing revenue. Prices set too high can
also impact revenue as it prevents interested customers from purchasing the product. Setting the
right price level often takes considerable market knowledge and, especially with new products,
testing of different pricing options.

Trigger of First Impressions - Often customers' perception of a product is formed as soon as they
learn the price, such as when a product is first seen when walking down the aisle of a store.

Important Part of Sales Promotion - Many times price adjustments are part of sales promotions that
lower price for a short term to stimulate interest in the product. However, marketers must guard
against the temptation to adjust prices too frequently since continually increasing and decreasing
price can lead customers to be conditioned to anticipate price reductions and, consequently,
withhold purchase until the price reduction occurs again.

Pricing Method

There are different types of pricing methods which are given below: 

Cost Based Pricing Method

123

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Profit Maximization
The monopolist's profit maximizing level of output is found by equating its marginal
revenue with its marginal cost, which is the same profit maximizing condition that a
perfectly competitive firm uses to determine its equilibrium level of output. Indeed, the
condition that marginal revenue equal marginal cost is used to determine the profit
maximizing level of output of every firm, regardless of the market structurein which the
firm is operating.
In order to determine the profit maximizing level of output, the monopolist will need to
supplement its information about market demand and prices with data on its costs of
production for different levels of output. As an example of the costs that a monopolist
might face, consider the data in Table 1 . The first two columns of Table1 represent the
market demand schedule that the monopolist faces. As the price falls, the market's
demand for output increases. The third column reports the total revenue that the
monopolist receives from each different level of output. The fourth column reports the
monopolist's marginal revenue that is just the change in total revenue per 1 unit
change of output. The fifth column reports the monopolist's total cost of providing 0 to
5 units of output. The sixth and seventh columns report the monopolist's average total
costs and marginal costs per unit of output. The eighth column reports the monopolist's
profits, which is the difference between total revenue and total cost at each level of
output. 

TABLE Monopoly Output, Revenues, Costs, and Profits

1

Output Price Total Marginal Total Average Marginal Monopoly

revenue revenue cost total cost cost profits

0 $14 $0 — $2 — — −2

1 12 12 $12 6 $6 $4 6

2 10 20 8 8 4 2 12

3 8 24 4 12 4 4 12

4 6 24 0 20 5 8 4

5 4 20 −4 35 7 15 −15

The monopolist will choose to produce 3 units of output because the marginal revenue
that it receives from the third unit of output, $4, is equal to the marginal cost of
producing the third unit of output, $4. The monopolist will earn $12 in profits from
producing 3 units of output, the maximum possible.

Graphical illustration of monopoly profit maximization. Figure 1 illustrates the

monopolist's profit maximizing decision using the data given in Table 1 . Note that
the market demand curve, which represents the price the monopolist can expect to
receive at every level of output, lies above the marginal revenue curve. 

Figure
1 The monopolist's profit-maximizing decision

The result of the monopolist's price searching is a price of $8 per unit. This equilibrium
price is determined by finding the profit maximizing level of output—where marginal
revenue equals marginal cost (point c)—and then looking at the demand curve to find
the price at which the profit maximizing level of output will be demanded.
Monopoly profits and losses. The monopoly in the preceding example made profits
of $12. These profits are illustrated in Figure 1 as the shaded rectangle
labeled abcd. While you usually think of monopolists as earning positive economic
profits, this is not always the case. Monopolists, like perfectly competitive firms, can
also incur losses in the short-run. Monopolists will experience short-run losses
whenever average total costs exceed the price that the monopolist can charge at the
profit maximizing level of output.
Absence of a monopoly supply curve. In Figure 1 , there is no representation of the
monopolist's supply curve. In fact, the monopolist's supply schedule cannot be depicted
as a supply curve that is independent of the market demand curve. Whereas a perfectly
competitive firm's supply curve is equal to a portion of its marginal cost curve, the
monopolist's supply decisions do not depend on marginal cost alone. The monopolist
looks at both the marginal cost and the marginal revenue that it receives at each price
level. In order to determine marginal revenue, the monopolist must know market
demand. Therefore, the monopolist's market supply will not be independent of market
demand.
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 Ask Cliff
 My economics teacher said something about  stagflation, what is that, exactly?
 Can you explain to me the impact money will have on the future (or my future. I am 16 years
old)?

PERFECT COMPETITION
A fundamental aspect of an economy is
competitions. Firms compete against each other
PERFECT
to offer goods. There is a definition of
COMPETITION-
economicperfect competition. Perfect
Competition in which
competition means economic forces at work,
market forces operate
uninterrupted by any other force. For a market to
without any outside
have perfect competition, it must meet several
interference.
conditions: buyers and sellers both take the
market price as given, there are a large number
of competing companies, there is nothing to
keep more companies from entering the market,
all firms produce the exact same products, firms
can come and go immediately with no delay
whatsoever, everyone would have instantaneous
and complete information about all firms, all
firms have make profit as their one and only
goal.

Even though perfect markets do not exist, they

are useful to analyze real markets because
putting in many other factors is compounding
the problem at this point. Competitive firms
have supply curves, first of all. Because of the
fact that they themselves must actually adjust to
changing market situations. A firm with no
competition can set whatever prices they want
since people have to buy their products anyway.
The demand curves for competitive firms,
however, are almost perfectly elastic because no
matter how these firms change their production,
in a perfectly competitive economy, there are so
many firms out there that its production will not
affect anything. The market as a whole has a
demand curve, but each individual firm's
demand curve is perfectly horizontal: no matter
how they change the production, price stays.
Remember, firms are price takers, too in perfect
competitions, they don't set prices. They set
prices at market equilibrium.

PROFITS IN PERFECT COMPETITION

In a perfectly competitive market, firms' only
goal is to make as much of a profit as
PROFIT-Money left
possible, profitbeing (revenue) - (cost). To
over after costs are
maximize profit, they must get to a point when
subtracted from
marginal cost, the cost of each additional unit of
revenue.
output, equals marginal revenue, the income of
each additional unit of output. This is because,
when the production is lower, you can still ZERO PROFIT
produce more products that will still earn you a CONDITION-The
profit, but when the production is higher than situation in which, in
that, the extra amount of production is costing the long term, total
more than it is earning you. profit made is zero.

Fig 3.2.1-To maximize

profit, firms reach a point
when marginal profit is
equal to marginal
revenue, the point when
there is a maximum
difference between
revenue and cost.

Fig 3.2.1-Maximizing profit

This profit-maximizing concept can be seen in

the graph above. The straight line represents
maximum profit. It is at this point that the
difference between revenue and cost is at a
maximum. Remember that costs go down and
then go up sharply as production increases, so
you try to attain minimum cost with maximum
revenue and it is at the point where marginal
revenue equals marginal cost that you attain that
point. Conversely, there is a shutdown point of a
firm, at which a company would do better by
shutting down than lose money by keep going.
A company at this point saves more money by
doing nothing than keep producing and turning
in a loss (the cost is too high and the price is too
low for each unit of output).

Another condition caused by perfect competition

iszero profit condition, the condition that in the
long run, total profit made is zero. This is
because, in perfect competition, as companies
make more profit, others will see opportunity.
Given that there are nothing preventing people
from entering the market, then people will enter
the market, raising total production and driving
prices down. This will bring profits down.
However, when profits go down too much,
companies will be forced out of business and the
survivors will be better off. So, in the long run,
there is competitive equilibrium in a perfectly
competitive economy.

MARKET STRUCTURE
In reality, no such thing as a true perfectly
competitive market exists. There are other types
MONOPOLY-
of market structures,
Market structure in
however: monopoly, oligopoly,
which there is only
and monopolistic competition. A monopoly is a
one company.
market structure in which there is only one
single company that is in the industry. An
oligopoly is a market structure in which there OLIGOPOLY-
are a small number of interdependent companies Market structure in
in the industry. Monopolistic competition is a which there are a few
market structure in which many companies companies who make
operate independent of each other (although not decisions based on
so many as to be the number approaching each others' actions.
infinity specified by perfect competition) in an
industry. There have been indices of market MONOPOLISTIC
structuring developed over time. We measure COMPETITION-
how much of an industry is concentrated in the Market structure in
hands of a small group of companies. This tells which there are many
independent
companies.
just how competitive an industry really is.

What kind of market structure an industry is

accounts for how companies operate within it.
Unregulated monopolies with no government
ties can generally do whatever they want. After
all, there's no one else to offer a different sort of
service or a different price. In oligopolies, there
are few companies so if you were a copmany
and you made some sort of decision, it will
always be made to be a strategic tactic made to
outmaneuvre your rivals. In monopolistic
competition, there are too many companies and
so you would just think about yourself and
attract customers because what you do will not
affect anyone else.

MONOPOLISTIC COMPETITION
In monopolistic competition, there are many
firms vying for control of one market. Each firm
offers a different type of product, as opposed to
perfect competition in which all offer the same
product. Each firm, then, has a monopoly in the
market of their own product. Thus, the firms try
to advertise their products so people buy more
of their product. At the same time, monopolistic
competitors do not try to compete so as to
undermine other competitors. There are too
many other businesses in a monopolistic
competition to worry about them, you simply try
to get people to buy your own product as
opposed to respond to others' tactics.

Monopolistic competition, because there are so

many relatively weak firms, there are no barriers
to entry. Companies can enter the market
relatively easily (although, of course, not as
perfectly easy as in perfect competition). This
makes for a long-term equilibrium competition
of no profit. When there is profit to be made,
just as in perfect competition, new companies
come in and take that profit away through
expanded production and dropping prices.
Unlike in perfect competition, though,
monopolistic competition has a normal
downward-sloping demand curve. The
competing companies in monopolistic
competition are not so much price takers as
price setters and thus the demand curve is
sloped, not set constant at the market price.

OLIGOPOLY
The primary property of oligopoly is a small
number of competing firms. Thus, to be able to
CARTEL-A
best compete, firms make decisions based on
collection of
planning against their rivals. That is the key
independent firms
property of oligopolies: all firms in oligopolies
that confer together
execute strategic planning. Sometimes, a market
and act as a
is only an oligopoly in theory. Some oligopolies
monopoly.
act ascartels, in which many firms act as one.
There are technically several firms but they all
confer together to act as a monopoly. This IMPLICIT
practice is illegal in many places, though it still COLLUSION-Many
does happen. Even though the cartel model is no firms following in
longer prevalent, there is implicit collusion. In each others' policies
implicit collusion, many firms will follow each although there is no
other in making decisions, though they are not policy making among
really meeting. For example, when one firm them.
drops its prices, all the other firms follow suit.

Another possible model of oglipoly is the

contestable market model, in which firms make
decisions based on barriers to entry and exit. In
this model, oglipoly companies make decisions
so that new firms can not enter the market.
Oligopoly economic models really involve pre-
existing business conventions that are basically
unwritten laws that oligopoly companies just
follow. Oligopoly companies on a small scale
often use the cartel model, though a major
aspect preventing that is the entry of an outside
company that does not care for the cartel's rules.
That outside company can drive the cartel out of
business by offering much lower prices.
Oligopolies also tend to get into heated
competition in the form of price wars and other
ways of corporate fighting. There are a small
number of companies and thus, the relations
between companies are very important.
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