Ch 04 Price Differentiation ( 價格差異化 )

Ch 04 Price Differentiation ( 價格差異化 ) Or price discrimination ( 區別 ): A seller charges ( 收費 ) different prices to different customers 4-1 4.1 Economics of Price Differentiation 4.2 Limits to Price Differentiation 4.3 Tactics for Price Differentiation 4.4 Volume Discounts 4.5 Calculating Differentiated Prices 4.6 Price Differentiation and Consumer Welfare 閱讀張美惠譯, 資訊經營法則, 時報出版,2000 第三章資訊分版

4-2 4.1 Economics of Price Differentiation Contribution opportunity ( 機會 ) from price differentiation Slide 3-26 Single price: (Region A) Charge $8.75 Profit ($8.75 $5.00) 3,000 = $11,250 Perfect ( 完美 ) price differentiation: Region B and C Third-degree price discrimination ( 第三級差別定價 ): Charge = w.t.p.

Impact of Market Segmentation ( 市場區隔 ) (1/2) Pay > $7, d 1 (p 1 ) = min [ 4,400, (10,000 800 p 1 ) + ] Willing to pay more than $7 Pay < $7, d 2 (p 2 ) = (5,600 800 p 2 ) + Willing to pay $7 or less 4-3

4-4 Impact of Market Segmentation (2/2) Slide 4-2 4-3 Unsegmented Segment 1 Segment 2 Total (from Seg 1 and 2) Change (%) Average $8.75 $8.75 $6.00 $8.17 (*) 6.6 price Demand 3,000 3,000 800 3,800 26.7 Revenue $26,250 $26,250 $4,800 $31,050 18.3 Gross contribution $11,250 $11,250 $800 $12,050 7.0 (*) (8.75 3,000 + 6 800) / (3,000 + 800) = $8.17 Win-win for seller and buyers

4.2 Limits ( 局限 ) to Price 4-5 Differentiation Imperfect ( 不完美 ) segmentation: Do not know the precise willingness to pay Best that can be done: Create market segments such that the average w.t.p. is different Cannibalization ( 競食 ): High-w.t.p. customers masquerade ( 偽裝 ) as low-w.t.p. customers Arbitrage ( 套利 ): Incentive ( 動機 ) for third-party arbitrageurs ( 套利者 ) to buy the product at the low price and resell to high-w.t.p. customers

4-6 4.3 Tactics ( 策略 ) for Price Differentiation: (1) Group Pricing ( 團體定價法 ) (1/2) Offer different prices to different groups of customers for exactly the same product. Examples: Student discounts ( 折扣 ) Senior citizen discounts Ladies Night specials Family specials Favorable terms offered by manufacturers or wholesalers to large retailers such as Wal-Mart Lower prices offered to government, educational, and nonprofit organizations ( 非營利組織 ) by suppliers

4-7 4.3 Tactics for Price Differentiation: (1) Group Pricing (2/2) Four criteria ( 準則 ) to be successful Unambiguous ( 清楚的 ) indicator of group membership: A student ID or a driver s license ( 駕駛執照 ) that lists age Group membership must strongly correlate with ( 相互關聯 ) price sensitivity: Senior citizens ( 老人 ), as a whole, more price sensitive Product or service not easily traded ( 交易 ) or exchanged ( 交換 ) among purchasers The segmentation must be both culturally ( 文化 ) and legally ( 法律上 ) accepted

4-8 4.3 Tactics for Price Differentiation: (2) Channel ( 通路 ) Pricing (1/2) Sell the same product for different prices through different distribution channels ( 配銷通路 ). Examples: Barnes and Noble: Online different from its outlets ( 商店 ) Airline tickets: Special web-only fares ( 票價 ) through the Internet but not through travel agencies ( 旅行社 ) Fashion and home furnishing merchants: Lower prices through mail-order catalogs ( 郵購商品廣告目錄 ) than through retail ( 零售 ) outlets

4-9 4.3 Tactics for Price Differentiation: Why? (2) Channel Pricing (2/2) Cost: Internet is cheaper Continental Airlines ( 美國的大陸航空 ): Distribution costs for a $325 ticket, $43 sold through a travel agent versus $18 through Continental s Web site Customers arriving via different channels have different price sensitivities ( 敏感度 ) For personal loans ( 貸款 ), Through the Internet > Call center > Retail branch ( 分店 )

4-10 4.3 Tactics for Price Differentiation: (3) Regional ( 地區 ) Pricing In Latin America, McDonalds sells hamburgers for higher prices in wealthy ( 較富有的 ) neighborhoods than in poorer ones A roundtrip ( 來回 ) New York-Tokyo tickets purchased in Japan will usually cost more for many airlines than the same ticket purchased in the United States ( 長榮航空 : 桃園來回 LA) Price of water at Dublin ( 愛爾蘭共和國首都 ) airport (2006): 3.60 ( = 3.6 40 = NT 144) for 500ml ( 桃園 ) http://www.askaboutmoney.com/showthread.php?t=43599

4-11 4.3 Tactics for Price Differentiation: (4) Couponing and Self-Selection Choose a mechanism that allows customers to self-select ( 自我選擇 ), but takes additional time, effort, or flexibility ( 彈性 ) to obtain the discounted price Price sensitive Examples: Discount coupons ( 折價券 ) through newspapers, direct mail, and magazines Mail-in rebates ( 郵寄退款 ) for purchases of a good Movie theaters: Lower prices for a weekday matinee ( 日場 ) Brand-name retailers such as Ralph Lauren, the Gap operate outlet stores in out-of-the-way ( 偏僻的 ) locations (for a substantial discount)

4-12 4.3 Tactics for Price Differentiation: (5) Product Versioning ( 版本 ) (1/3) Design or develop products (virtual or real) with minor ( 小的 ) differences ( 差別 ) Inferior ( 較差的 ) goods: Mobile/Exxon and Shell sell excess gasoline ( 汽油 ) in bulk ( 大批 ) at low prices to off-brand dealers Wine producer: Different label ( 標籤 ) at about half the price Damaged goods: Intel 486DX processor sold for $588, 486SX (math processor disabled ( 使無效 ), more expensive to produce) for $333 Supply-chain software or ERP software: Disable the features ( 特點 ) that the customer did not purchase

4-13 4.3 Tactics for Price Differentiation: (5) Product Versioning (2/3) Superior ( 較好的 ) goods: (Sweden) Spendrups Old Gold: Premium beer sold in a special, highly distinctive bottle. Price 25% to 50% higher than other brands ( 品牌 ) Proctor-Silex: $54.95 with a small light ( 燈 ) indicating ( 指示 ) when the iron ( 熨斗 ) is ready to use (with extra manufacturing cost $1), next best model $49.95

4-14 4.3 Tactics for Price Differentiation: (5) Product Versioning (3/3) Product lines ( 產品線 ): Product Vertical ( 垂直的 ): A higher-priced product superior to a lower-priced one Ocean-view room than a parking-lot-view room Example: QuickBooks financial software by Intuit Basic Edition Pro Edition Premier edition Enterprise Solutions Price $199.95 $299.95 $499.95 $3,500.00 Horizontal ( 水平的 ): Different customers prefer ( 喜愛 ) different products, e.g., Coca-Cola with Classic Coke, Diet Coke ( 無糖 ), Cherry ( 櫻桃 ) Coke, etc.

4-15 4.3 Tactics for Price Differentiation: (6) Time-Based Differentiation ( 差異化 ) Amazon: 5- to 9-day Super-saver shipping free (Orders $25 and Over) while charging $3.97 for standard shipping (faster) Passenger airline: Discount ( 折扣 ) rates if book ( 預訂 ) a week or more prior to departure ( 出發前 ) Software- and hardware-support contracts ( 合約 ): Charge more for 2-hour response ( 反應 ) than for 2-day response Fashion goods: Cost more during the beginning ( 開始 ) and marked down ( 減價 ) toward the end

4-16 4.4 Volume Discounts ( 量大折扣 ) (1/2) St. Louis Commerce ( 商業 ) magazine Order size 5-50 51-100 101-250 251-500 501 or more Unit price $2.75 $2.50 $2.25 $1.75 $1.50 Reasons to offer volume ( 量 ) discounts Transactions ( 交易 ) or order costs ( 訂購成本 ) (average as volume ) Averagecost Order cost Variable cost Volume Volume Order cost Volume Variable cost

4-17 4.4 Volume Discounts (2/2) Reasons to offer volume discounts Decreasing marginal utility ( 降低的邊際效用 ): First versus second cold drink for a thirsty ( 口渴的 ) customer Example: Demand curve d(p) = 500 2p Single price $125 with revenue $31,250 Two-tier pricing ( 兩階段訂價 ): First 250 copies for $125 each, $75 for each additional additional revenue $7500 (p = 200 d = 100) Increasing price sensitivity ( 靈敏度 ): A seller can differentiate ( 區別 ) among large-volume, highly price-sensitive buyers and smaller-volume, less price-sensitive buyers

4-18 Nonlinear Pricing St. Louis Commerce magazine Drawback: $562 (for 250 copies) > $455 (260 co.) Remedies ( 救濟方法 ): Incremental ( 遞增的 ): Buy one, get the 2nd at half price Total volume over some period: Airlines frequent-flyer programs ( 常飛旅客計畫 ), end-of-quarter ( 季 ) rebate ( 折扣 ) for the distributor ( 批發商 )

4-19 4.5 Calculating Differentiated Prices: Optimal Pricing with Arbitrage ( 套利 ) A third party purchases ( 購買 ) the product at a low price and resells it at a high price c i : Delivered cost (including transportation) in country i a ij : Transportation ( 運輸 ) cost from country i to country j Nonlinear programming ( 非線性規劃 ) under the possibility of arbitrage (for optimizing international ( 國際的 ) prices) max p n i1 p subject to i c i p p d i j i ( p 0 i p i ) a ij ; i j

4.5 Calculating Differentiated Prices: Optimal Pricing with Cannibalization ( 競食 ) (1/3) : Cannibalization fraction ( 比率 ) (Fraction of customers find a way to buy at the lower price) = 0: Perfect ( 完美的 ) differentiation. None of the high-w.t.p. customers buy at the lower price = 1: No differentiation. All customers buy at the lower price Price-response curves: d 1 (p 1 ) = (1 ) min [ 4,400, (10,000 800 p 1 ) + ] d 2 (p 2 ) = (5,600 800 p 2 ) + + 4,400 There are 4,400 total customers with a w.t.p. > $7 4-20

max( p p1, p2 4-21 4.5 Calculating Differentiated Prices: Optimal Pricing with Cannibalization (2/3) Optimization problem (c = 5) 1 subject to c)(1 ) min p 2 $7.00 4400,(10,000 800 p ) ( p c) (5600 800 p ) 4400 Optimal prices: p 1 * = $8.75, p 2* = min($6 + $2.75, $7) ( 下張投影片 ) 1 2 2

4-22 4.5 Calculating Differentiated Prices: Optimal Pricing with Cannibalization (3/3) If 4,400 10,000 800 p 1 ( p 1 7), 12.5 p 1 and 7 p 2 objective max( p p1, p2 p p 1 2 p 1 1 c)(1 )(10,000 800 p (1 ) 10,000 800 p (5600 800 p 8.75, p 2 2 1 6 2.75 ( p ) 4400 ( p 1 1 ) ( p 5)( 800) 2 2 5) (5600 800 p 0 5)( 800) 0 2 ) 4400 Optimal prices: p 1 * = $8.75, p 2* = min($6 + $2.75, $7)

4-23 4.6 Price Differentiation and Consumer Welfare Consumer surplus (CS 消費者剩餘 ): Difference ( 差別 ) between his w.t.p. and the prices at which he purchases Total CS for the left ( 左邊 ) with a single price: Area B Extra ( 額外的 ) CS for the right with two prices: Area C 2. For the seller, higher profit with area A 2

4-24 Another Scenario ( 情節 ) Seller charges 2 prices: $8 and $10 Sell 2,000 units at $10 gross ( 總的 ) contribution $10,000 ( = 2,000 * (10 5) ) Sell 1,600 units at $8 gross contribution $4,800 Total contribution $14,800 (> $12,050 originally) Difference in consumer surplus between the two-price policy and the single-price policy (at $8.75) CS $0.75 1,600 $1.25 2,000 = $1,300 Reduce ( 降低 ) total consumer surplus