Professional Documents
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– Company resources
– Product homogeneity (or product or market variability)
– Competitors’ marketing strategy
– Product life-cycle stage,
5.3. Market Segmentation, Targeting and Positioning
Target Marketing Process
Linking customer needs to marketing action follows
sequence of processes
1) Segmentation: identify and describe market segments
2) Targeting: evaluate segments and decide which to go
after
3) Positioning: design a product or service to meet a
segment’s needs and develop a marketing mix that
will create a competitive advantage in the minds of
the selected target market.
5.3. Market Segmentation, Targeting and Positioning
Market Positioning
Positioning starts with a product, but it is not what you
do to a product.
It is what you do in the target market’s or target
customer’s mind (perceptions, feelings, and
impressions).
Positioning refers, therefore, to the place that a brand
occupies in the minds of the customers and how it is
distinguished from the products of the competitors and
different from the concept of brand awareness.
5.4. Price Discrimination
For firms with market power, price discrimination refers to
the practice of selling the same good or service at different
prices for the purpose of extracting maximum profit.
Price discrimination may involve
▪ Charging different buyers different prices for the same
product or
▪ Charging the same consumer different prices for different
quantities of the same product.
Thus, in price discrimination, a firm sells identical products in
two or more markets at different prices.
Price discrimination takes us away from the standard
assumption in theory of the firm that there is a single profit-
maximizing price for the same good or service.
5.4. Price Discrimination … Continued
Main aims of price discrimination:
◦ To increase revenue
◦ To extract the maximum profit
◦ To improve cash flow
Conditions for price
discrimination
a) Sufficient monopoly (market) power. Monopolist firms
always have pricing power- price makers not takers
b) Identifying different market segments; i.e., consumers
with
c) different price elasticities of demand
Ability to separate different groups. Requires information
d) (or sufficient market intelligence).
Ability to prevent re-sale (arbitrage). No secondary
markets where arbitrage can take place at intermediate prices.
Example: limiting sales, age-restrictions, use of ID cards
5.4. Price Discrimination … Continued
Types of price discrimination
There are several types (forms) of price
discrimination.
Economists have identified three degrees of price
discrimination;
a) First-degreenamely:
price discrimination,
b) Second-degree price discrimination,
c) and
Third-degree price discrimination.
5.4.1. First-degree Price Discrimination
First-degree price discrimination (also called perfect price
discrimination) occurs when a firm (or a seller) charges
each consumer his reservation price, the maximum amount
that he is willing to pay, for each unit.
▪ A firm charges each buyer a different price for each
individual unit of a given product purchased.
▪ The producer charges different prices for different units
▪ The price charged for each unit purchased is based on
the seller’s knowledge of each buyer’s demand curve.
5.4.1. First-degree Price Discrimination … Continued
First degree price discrimination is the extreme form of
charging different prices to different consumers, and makes
use of the concept of “reservation price”.
A consumer’s maximum willingness to pay is defined to be
their reservation price. Reservation Price is the maximum
price that a consumer is willing to pay for a good. Each
consumer pays its own willingness to pay for each unit
First-degree price discrimination is potentially the most
profitable of the three types of price discrimination.
In first-degree price discrimination, a firm tries to
maximize
profits by extracting the buyer’s consumer surplus.
Because it is virtually impossible to satisfy its
informational
requirements, it is extremely rare in practice.
5.4.1. First-degree Price Discrimination … Continued
� = �+ 𝑑� �𝑛 = �� + 0.5��𝑖 𝑛0 − �𝑛
� 0 ��𝑖 − �𝑛 2 �𝑛
�
2
= ��𝑛 + 0.5��𝑛 − �0 + 0.5� − �𝑛
2
0 �𝑛
= ��𝑛 + 0.5��𝑛 − �𝑛
2 �𝑛
5.4.1. First-degree Price Discrimination … Continued
�� 2 𝜋 𝑑��𝐶
=� − < 0 … … … . (5.11)
��� 𝑑�
2
��� 20 − 2� 𝑑� − �𝑛 �𝑛 = 20� − � 2 7 − �𝑛 �𝑛
0
= 0
2
= 20�𝑛 − �𝑛 2 − 20 0 − 0 − �𝑛 �𝑛
��� 20�𝑛 − �𝑛 2 − �𝑛 �𝑛
=
Since P = ETB 6 implies = 7, we have
Q
� 20(7) − − 6 = 140 − 49 − 42 =
� (7)2 7 ��𝐢��𝐫 ��𝟗
Therefore, the actual value of consumer surplus ETB 49.
�
is =
5.4.1. First-degree Price Discrimination … Continued
Numerical example (optimal price and output determination):
Let’s consider a firm whose demand curve and marginal
revenue curve are given by the following equations:
P = 150 – 5Q
MR = 150 – 10Q
Let’s assume that the firm’s marginal cost is given 5Q with
by
noa)fixed cost the profit-maximizing price, output and profit of
Calculate
the firm without price discrimination.
b) Calculate the profit-maximizing price, output and profit of
the firm with price discrimination.
c) Calculate the demand elasticities of the two segments at
their profit-maximizing prices.
5.4.1. First-degree Price Discrimination … Continued
Solution
a) If there is no price discrimination, the profit-maximizing
output for a firm facing a downward-sloping demand
curve occurs at a point at which its MR = MC.
150 – 10Q = 5Q → Q = 10
▪ The demand curve tells us that the firm should set price at
P = 150 – 5(10) = ETB 100
▪ Since there is no price discrimination, ETB 100 is charged
for each of the 10 units. Thus, the total revenue is
TR = 100 (10) = ETB 1,000
▪ The total cost is
TC = ETB 275
▪ The total profit is ETB 725 (ETB1,000 – ETB 275).
b) The demand curve tells us that the reservation price, the
maximum price that consumers will pay, is different
from marginal revenue as shown in the table below:
Marginal Reservation
Q Marginal Cost
Revenue Price
1 5 140 145
2 10 130 140
3 15 120 135
4 20 110 130
5 25 100 125
6 30 90 120
7 35 80 115
8 40 70 110
9 45 60 105
10 50 50 100
5.4.1. First-degree Price Discrimination … Continued
With price discrimination, each customer is charged a
price that corresponds to the demand function.
So, the optimal output level occurs when the
marginal cost curve intersects the demand curve (or
the reservation price instead of the marginal revenue
curve). MC = P → 5Q = 150 – 5Q → Q = 15
As the reservation price curve intersects marginal cost
curve at Q = 15 units, optimal output is 15 units and total
revenue is the sum of prices charged for those 15 units
TR = P1 + P2 + P3 + … + P15 = ETB 1650
Since total cost for 15 units is ETB 600, profit when
there is
price discrimination is ETB 1,050 (= 1,650 – 600).
5.4.1. First-degree Price Discrimination … Continued
This example shows that by engaging in perfect price
discrimination, a company or a firm earns an additional
profit of ETB 325 (= 1,050 - 725).
This arises from the firm’s ability to charge a price of
ETB145 for the first unit, ETB140 for the second unit
and so on instead of a single price of ETB100 for each
unit
and due to increase in the optimal output from 10 to 15.
The difference between reservation price and the market
price represents consumer surplus.
Through perfect price discrimination, the producer has
effectively captured all of the consumer surplus.
5.4.1. First-degree Price Discrimination … Continued
c) Elasticities of demand at the two segments of profit-
maximizing prices.
Defining elasticities of demand 𝛆i
i = (dQi/dPi)
��
(Pi/Qi)
Since P = 150 – 5Q implies Q = 30 – 0.2P,
Thus, elasticities of demand
��i =at-0.2
the two segments of profit-
maximizing prices are (Pi/Qi)
At P = 100,
𝛆 = -0.2 (100/10) = -2
At Q = 15, P = 75,
𝛆 = -0.2 (75/15) = -1
5.4.2. Second-degree Price Discrimination
Second-degree price discrimination sometimes referred to
as volume or quantity discounting. Second-degree price
discrimination occurs when firms sell their product in
“blocks” or “bundles” rather than one unit at a time.
Second degree price discrimination is a common form of
pricing and packaging.
In second-degree price discrimination, therefore,
▪ Different prices are charged for different blocks of units, or
▪ Different products are bundled and sold at a package price.
Second degree price discrimination takes advantage of
preference differences between consumers.
5.4.2. Second-degree Price Discrimination
Two or more different sized packages of a good with
different prices per unit is an example of second-degree
price discrimination strategy: A 12-units and a 24-units pack
of exercise book is a practical example of this strategy.
This strategy is effective only when the consumers have
different preferences for different sized packages, and different
demand curves reflect this difference.
In the case of second-degree price discrimination, however,
sellers attempt to maximize profits by selling product in
blocks or bundles rather than one unit at a time.
Therefore, second-degree price discrimination differs from
first-degree price discrimination in the manner in which the
firm attempts to extract consumer surplus.
5.4.2. Second-degree Price Discrimination … Continued
Common forms of second-degree price discrimination:
Commodity Bundling …
Table 5.1 Commodity bundling and vacation
packages
Group Room and board Entertainment