Fall 2017 MECN446: Pricing Strategies

MECN446: Pricing Strategies

Professor Donald Dale

Summary: This course focuses on the economic principles of pricing. We do this through a mixture of
lecture, case discussion, and modeling/analysis. This course is particularly appropriate for anyone who
will have significant input into, or decision power in, the pricing process. The first portion of the course
is quite case-intense; the latter part has proportionally more lecture and analysis.

Topics: There are three basic ways in which prices are set; we focus on the latter two (though
negotiation is often measured tangentially):

1. Negotiation: The oldest form of price setting, still going strong (even on the internet).
2. Posted Price: The seller announces a price and waits for buyers who are willing to transact at
that price.
3. Auctions: The seller has buyers compete among themselves to determine the price at which a
transaction will be executed.

Examples of the kinds of questions we address are:

• How can you apply basic core economic concepts to pricing when you do not have the
information typically given to you in a textbook?
• When and how should you sell by auction, rather than other methods?
• How does competition impact whether you bundle products? How you time a price increase?
Whether, and when, you should enter a market?
• Who will move first on an inevitable industry-wide price change?
• When does it make sense to attempt price customization? When do such strategies tend to
backfire?
• How should you sell a limited supply of non-durable products when demand is uncertain? (Think
hotel rooms, airline tickets…)
• What strategies can a procurer use to intensify price competition among suppliers? What
counter-strategies can suppliers use?

An important note on course overlap: Given the subject matter of this course, it is not surprising that
there is some overlap with other elective courses at Kellogg. Besides building on core courses (MECN430
and STRT430), there is some overlap with MECN441, and (much less) overlap with MKTG462. In
designing a course, the tradeoff is between

i. allowing some overlap, at the cost of some redundancy, and

ii. omitting some key topics – yielding an incoherent course.

Choice (ii) also neglects those students who did not take the above other electives. For these
reasons, I prefer to overlap when necessary. However, even when topics overlap with other courses,
the intention is to offer new or different insights and perspectives than what you see in those other
courses. In addition, a majority of past students found the overlap to be worthwhile.

Details: Optional reading for the course is a book by Nagle, Hogan and Zale titled The Strategy and
Tactics of Pricing. There are some points of overlap between our course and this book, but mainly I
Fall 2017 MECN446: Pricing Strategies

recommend it as side-reading. That book goes deeper into the marketing dimension of pricing than the
course does.

Evaluation: The course grade will be based on

• Homework assignments (35%)

• Class participation (10%)
• Final Exam (55%) (during finals week, a sit-down, timed exam)

Some homework assignments are to be done individually, while others are to be done in groups; details
will be announced week-to-week. Submissions are expected to be on paper turned in at the beginning of
class or submitted as pdf documents via Canvas. Groups will be randomly assigned. I will not accept late
assignments.

The class participation grade has little to do with attendance. I am looking for comments or questions
that are insightful or raise relevant, thought-provoking issues. Case discussions are one opportunity for
this, but so are other lectures and discussions.

Below is a lecture schedule, as well as due dates for assignments. I reserve the right to make changes so
as to adapt to the pace of the class.

I can be contacted by email at donald.dale@kellogg.northwestern.edu, and my office is 530 Jacobs.

Please note that since this course meets only once weekly, “Session 1” refers to the first 85 minutes of
our first class meeting, and “Session 2” refers to the second 85 minutes, and so on. Note also that I have
not yet finalized the selection or order of cases for discussion, so the outline below is tentative.

Outline

Session 1

• Introduction
• Measuring Price Sensitivity

Session 2

• Relevant aspects of regression

• Conjoint and logit analysis
• Read Chapters 1, 2, 3 of lecture notes to prepare for this lecture

Session 3

• Metabical case discussion

• Review basics of monopoly pricing (chapter 4 of lecture notes)
• Homework #1 due

Session 4

• Biopure case discussion

Fall 2017 MECN446: Pricing Strategies

Session 5

• Cambridge Software case discussion

• Homework #2 due

Session 6

• Colonial Homes case discussion

Session 7

• Medicines case discussion

Session 8

• Agency models
• Homework #3 due

Session 9

• Auctions (chapter 5 of lecture notes)

Session 10

• Auctions (continued)

Session 11

• Price Discrimination (chapter 6 of lecture notes)

Session 12

• Peripheral Products case discussion

• Homework #4 due

Session 13

• Price Discrimination and Market Segmentation

Session 14

• Revenue Management (chapter 6.3 of lecture notes)

• Pricing and Competition: introduction (chapter 7 of lecture notes)
• Homework #5 due

Session 15

• Pricing and Competition: signaling and capacity

Session 16

• Pricing and Competition: Differentiation

• Compatibility and Competition
• Homework #6 due
Fall 2017 MECN446: Pricing Strategies

Session 17

• Bitter Competition (A) case discussion

• Homework #7 due

Session 18

• Bitter Competition case discussion (continued)

Session 19

• UK Credit Card case discussion

Session 20

• Universal Rental Car Simulation debriefing

Final Exam: timed exam, scheduled during finals week.