PRICING POLICY
IMBA Managerial Economics
Jack Wu
PRICING
NORTHWEST AIRLINES
MINNEAPOLIS-NEW YORK
Business class
$ 1711
Unrestricted
economy
Advance purchase,
with penalties
Advance purchase,
for senior
$ 1267
$ 765
$ 692
EMIRATES AIRLINE, DUBAI-MUMBAI,
ECONOMY CLASS, MAY 2004
Fare
Restrictions
Price
Year KRTAE1
None
AED 2250
(US$ 613)
Special Excursion
QEE4MAE1
Min. 7 days, max. 4 mths
stay
AED 1900
Basic Season Special
Excursion LLE4MAE1
Low season; min. 7 days,
max. 4 mths stay
AED 1550
Basic Season Special
Excursion VLE4MAE1
Low season; min. 7 days,
max. 4 mths stay
AED 1200
EMIRATES AIRLINE, MUMBAI-DUBAI,
ECONOMY CLASS, MAY 2004
Fare
Restrictions
Price
Economy unrestricted
LRT
None
INR 25,600
Economy restricted
LRTIN1
None
INR 22,700
Regular Excursion
LEE3M1
Min. 7 days, max. 3
mths stay
INR 20,100
Special Excursion
VEE3MIN1
Max. 3 mths stay.
INR 17,000
(US$ 557)
EMIRATES AIRLINE
Why does Emirates charge lower fare for
passengers originating from Mumbai?
 How is this discrimination possible?

PRICING POLICY
uniform pricing
 complete price discrimination
 direct segment discrimination
 indirect segment discrimination
 bundling

Price (Thousand Yen per unit)
UNIFORM PRICING
80
55
marginal cost
30
marginal revenue
0
2500
Quantity (Units a year)
5000
demand
UNIFORM PRICING: PROFIT MAXIMUM
MR = MC
 Equivalently, set the incremental margin
percentage equal to the inverse of absolute value
of price elasticity of demand,

(price - MC) / price = -1/e
PRICE ELASTICITY
always set price so that demand is elastic
 if demand more elastic, then lower incremental

margin percentage (IM%) e
= -2  IM% =
1/2

e = -1.5  IM% = 2/3
PRICING PRIVATE-LABEL COLA
Suppose that WalMart learns that demand for
private-label cola is less elastic than the demand
for Coca Cola. Should WalMart set a higher price
for private-label cola?
UNIFORM PRICING:
SHORTCOMINGS
$


buyer surplus
potential buyers
price
marginal
cost
0
quantity
leaves buyers with a
lot of surplus
does not sell to every
potential buyer
COMPLETE PRICE DISCRIMINATION

price each unit at buyer’s benefit and sell
quantity where MB = MC
•
•

maximum profit -- theoretical ideal
different from MR = MC
implementation: must know entire marginal
benefit and marginal cost curves
COMPLETE PRICE DISCRIMINATION:
PRACTICE
bargaining
 auctions

DIRECT SEGMENT DISCRIMINATION, I
price by segment
 implementation

•
•
fixed identifiable characteristic --- basic for
segmentation
no re-sale
DIRECT SEGMENT DISCRIMINATION, II
simple case: uniform price within each segment
•
•
within each segment IM% = -1/e
for segment with more elastic
demand, then lower incremental
margin percentage (IM%)
DIRECT SEGMENT DISCRIMINATION, III
demand
80
55
30
(b) Women’s demand
marginal
revenue
marg.
cost
Price (Thousand Yen per unit)
Price (Thousand Yen per unit)
(a) Men’s demand
50
marginal
cost
40
30
demand
marginal revenue
0
2500 3000
Quantity (Units a year)
0
1000
Quantity (Units a year)
NYNEX TELEPHONE SERVICE
New York City
 residential -- $16/month
 business -- $23/month
How is discrimination possible?
ASIAN WALL STREET JOURNAL
Price for annual subscription, May 2006
Print: Hong Kong (HK$ 2,700)
US$ 348
Print: Singapore (S$ 525)
US$ 331
Print: Tokyo (Yen 94,500)
US$ 845
Interactive: Worldwide
US$ 99
 Why
different prices for print edition but not
interactive edition?
INDIRECT SEGMENT DISCRIMINATION
structure choice to earn different incremental
margins from each segment
 implementation

seller controls some variable to which segments are
differentially sensitive
 buyers cannot circumvent the variable

AIR TRAVEL: BENEFITS
Unrestricted Restricted
Traveler Segment Travel ($)
Travel ($)
Maria
Business
1000
200
Tom
Business
900
180
Robin
Vacation
500
400
Leslie
Vacation
280
224
AIR TRAVEL: INDIRECT SEGMENT
DISCRIMINATION
Product
Unrestrict
ed
Restricted
*MC=200
Fare
($) Sales
900
2
399
1
Total
Rev.
($)
1800
Total
Cost
($)
400
Profit
($)
1400
399
200
199
CHINESE EMBASSY: VISA FEES
Application period
1 day
3 days
7 days
Single entry
$75
$60
$25
Double entry
$85
$70
$35
PRICING POLICIES: RANKING
Profitability
Policy
Highest
Complete price
discrimination
Direct segment
discrimination
Indirect segment
discrimination
Uniform pricing
Lowest
Information
Requirement
Highest
Lowest
BUNDLING

strategy
pure bundling
 mixed bundling

CABLE TELEVISION: BENEFITS
“if every segment … was wild about one
thing and hated the rest, they have done
their job” (Economist)
Segment
Conservatives
Education
channel
$20
Music
channel
$2
Middle of road
$11
$11
PURE OR MIXED BUNDLING
What is the profit-maximizing pricing policy if
 marginal cost per channel = 0
 marginal cost per channel = $5
PURE OR MIXED BUNDLING
Generally,
 if item is costless, no loss from giving it to every
consumer --> pure bundling;
 if item is costly, then should avoid providing it to
low-benefit users --> use mixed bundling to
screen out low-benefit users.

Mixed bundling is form of indirect segment
discrimination
 structured choice between bundle and separates
