SPRING 2015
AEM 4160: Strategic Pricing
Prof. Jura Liaukonyte
HW4
Ground rules for Homework 1-5:
1. HW is due at the beginning of class on the due date designated for each homework (see
course website for the list of dates).
2. You should turn in your homework 100% typed. I realize that for some students
handwriting is more convenient or efficient, especially when it comes to writing out
math equations. However, you should practice typing math formulas in MS Word or
other word processing software of your choice.
3. Include a title page listing your name (or names if it is a group work) and homework
number.
4. Please staple your sheets. Both your TA and I will look at each homework, so we don’t
want to lose any of your sheets.
5. If I have specific instructions or rules relating to any individual parts within homework
assignments, I will list them there.
Ground rules for HW4:
1. HW4 is due on Tuesday, March 19th at the beginning of class
2. HW4 is group work. Please work in groups of 4.
PART I
HOTEL PRICING
The questions in this part of the homework deal with pricing hotel rooms and evaluating the
pricing performance. This exercise closely follows the one discussed in class regarding the
demand uncertainty and limited capacity. You can use the spreadsheet that is posted on the
course website to help you solve this problem.
1. The Fairmont Copley Plaza in Boston has 239 rooms. Copley offers an rL= $199 (low fare)
discount fare targeting leisure travelers. Regular fare is rH= $269 (high fare) targeting
business travelers. There is no shortage of demand for low fare rooms. However, the
demand for high fare rooms is uncertain and depends on business conventions and
conferences going on in town. From previous experience and hotel occupancy data, you
have estimated that the business traveler demand follows a normal distribution with
mean=40 and standard deviation=15. How many rooms should be protected for high fare
travelers? What should a booking limit be for low fare reservations?
2. Suppose the manager of the hotel wants to figure out how the optimal protection level (for
high demand travelers) varies with changes in price of the high fare (keeping the low fare
constant). Fill in the blanks of the following table (reproduce your own table in Excel).
Distribution
Mean
40
40
40
40
40
40
40
40
40
40
40
40
40
40
St. Dev.
15
15
15
15
15
15
15
15
15
15
15
15
15
15
High Price
209
219
229
239
249
259
269
279
289
299
309
319
329
339
Low Price
199
199
199
199
199
199
199
199
199
199
199
199
199
199
Critical Ratio
Number of rooms
reserved for high
demand customers
3. Graph the relationship between high price (X axis) and Number of rooms reserved for high
demand customers (Y axis). Intuitively explain why such relationship holds.
4. Now, instead of varying the high fare, manager wants to see how the optimal protection
level changes with respect to the certainty of predicted demand (different levels of standard
deviation). Fill in the blanks of the following table (reproduce your own table in Excel).
Distribution
Mean
St. Dev.
40
40
40
40
40
40
40
40
40
5
7.5
10
12.5
15
17.5
20
22.5
25
High Price
Low Price
269
269
269
269
269
269
269
269
269
199
199
199
199
199
199
199
199
199
Critical Ratio
Number of rooms
reserved for high
demand customers
5. Graph the relationship between Standard deviation (X axis) and Number of rooms reserved
for high demand customers (Y axis). Intuitively explain why such relationship holds.
PART II
A. Outcome measurement and bundled pricing arrangements in healthcare.
Read the following case study “The UCLA Medical Center: Kidney Transplantation”, HBS Case
No 9-711-410. Answer the following questions about this case (use your own wording!):
1. Describe UCLA’s bundled reimbursement for kidney transplantation. What are the key
choices UCLA has made in constructing the model? How has the reimbursement model
contributed to success?
2. How does UCLA measure its progress in kidney transplantation? Has measurement
contributed to success?
3. What are the implications of the outcome measurement system and reimbursement approach
in organ transplantation for the U.S. health care system as a whole?
B. Introduction to Behavioral Biases. Listen to the Freakonomics podcast “When
Willpower Isn’t Enough”
1. What were the main results of the gym experiment?
2. Does anyone in your study group engage in what K. Milkman calls “temptation bundling”?
Let each member of your team present an example of temptation bundling that they might
engage in or might want to aspire to engage in.
PART III.
Write a blog post. Blog assignment guidelines:
http://courses.cit.cornell.edu/jl2545/4160/blogguide4160.htm
Also check the blog website www.overtcollusion.com to see examples of good blog posts.
IMPORTANT: You have to submit your blog post in two ways:
1) as part of your typed and printed HW# and
2) emailed to your TA mfm88@cornell.edu. Please make sure that the emailed post contains the
names of group members.
Potential topics of choice for this HW assignment:
1. Pricing Information
2. Online Retailers
3. Advance Sales
4. Overbooking
5. Pricing with Capacity Constraints
6. Behavioral Pricing
7. Other topic that relates to issues we discussed in class.
In case you are unsure if your selected topic fits, email me and we will discuss!