M224 Managerial Economics Economics of Marketing Management

Marketing activities include developing, pricing, and promoting goods and services

Demand interdependencies

When the demand of one product affects the other

Different brands of the same product

A price change in good 1 demand shift in good 2 Positive or negative

Demand interdependencies

Decision criterion: if a decrease in profit from good 1 (due to a price decrease) is more than offset by increase in profit from good 2, the decision to increase price of good 1 is acceptable

Joint products

Products are related in production Producing one results in some quantity of the other In some cases, one is a by-product of the other (and has much less commercial value)

Temporal demand interdependency

Current price of product affects demand at some future period Promotional pricing market penetration strategy

Multiple markets

Firm sells a product in two or more markets, each with its own distinctive characteristics Price elasticity of demand may vary from one market to another Logical move for firm treat markets differently

Multiple markets

Shifting output from one market to another may also increase revenues

Total output, total cost remain the same Reallocation to another market stops when marginal revenues are equal

Marketing mix strategies designed to develop new markets or expand existing ones four Ps: price, promotions, product, place

Pricing strategies

Typical usage of 'rules of thumb'

Accurate estimates can be costly Periodic changes in pricing due to undesirable performance or as response to changing demand, costs, technology Higher than AVC (short-run) Higher than AC (long-run)

Feasible range of prices

Pricing strategies

Mark-up pricing

Widely used Adding a fixed percentage to variable or total cost per unit Typically low mark-up for fast moving items and for highly competitive goods Typically high mark-up for specialized, monopolized goods and services

Pricing strategies

Mark-pricing

Commonly determined using trial and error Optimal mark-up can be calculated consistent with MR = MC rule

Can be costly Crude estimates are acceptable if these estimates yield satisfactory levels of profit

Pricing strategies

Target-profit pricing

Setting price level where the desired level of profit will be realized Commonly used among public utilities, other goods that are subject to regulatory profit constraints

Pricing strategies

Break-even analysis

Criticized by economic purists deviates from the MC = MR rule does not consider reactions of competitors

Praised for its flexibility

Pricing strategies

Limit pricing

Entry-preventing strategy

Setting price at low levels to discourage new entrants and potential competitors Expectation of increased demand in the future Existing firm has cost advantage over potential entrants (i.e. economies of scale, superior technology) Firm lowers price to weed out inefficient competitors

Predatory pricing

Advertising

Major component of promotion Aim: to increase demand of a product or service

Advertising

An increase in advertising budget is acceptable if the corresponding revenues exceed production and distribution costs by an amount at least equal to advertising outlay

Advertising

Can be used as a defense strategy to strengthen customer loyalty more difficulty for firms to enter the industry means to arrest falling demand, decline in profits

Advertising

Reactions of competitors may dampen expected revenue In oligopolistic markets, interaction among firms may be intense

Advertising

Evaluating interaction effects

Cross elasticity of advertising proportionate change in competitor's advertising outlay with respect to change in firm's advertising outlay

Cross advertising price elasticity proportionate change in competitor's price with respect to change in firm's advertising outlay

Own elasticity of advertising proportionate change in quantity of product sold with respect to change in firm's advertising outlay

Advertising

Spillover effects may affect sales and profitability of firm's other products and services may affect demand in the next time period must be included in the analysis

Advertising

As an investment lagged effect on sales

Takes time for buyers to respond

generates stream of contributions to profit and overhead costs over an extended period of time similar to investing in machinery and buildings

Product strategy

Product development physical and qualitative changes in the product ranges from minor modifications to major transformations in product design and specifications evolving product characteristics

Quality most important aspect of product development

Product strategy

Decision rule expected increase in net contribution to profit is greater than increase in expenditure on product quality net contribution to profit = revenues less production and distribution costs

Marketing mix

May have high degree of interaction and interdependency Revenue negatively related with price movement along the demand curve advertising and quality shift in demand curve (change in revenues move in same direction)

Marketing mix

Costs production and distribution costs vary with output level, which in turn depends on price advertising costs costs associated with product quality

Reference
Poblador, Niceto S. (1998) The Economics of the Firm: Managerial Applications, UP Press Quezon City.