PRICING FOR GREATER

PROFIT
 CASE

• The Harry Potter books

PRICING COMMONLY OWNED SUBSTITUTES

• After acquiring a substitute good, raise price on both goods,

but raise price more on the more elastic (low-margin)
product.
• To avoid “cannibalizing”
• Think of earning profit for both goods
• also try to reduce inter-product cannibalization by
repositioning the products so they don’t directly compete with
each other
 PRICING COMMONLY OWNED
COMPLEMENTS

• After acquiring a complementary product, reduce price on

both products to increase profit.
• Acquiring a complement makes aggregate demand more
elastic than individual demand. And with a more elastic
aggregate demand, you want to reduce price.
 CAPACITY SERVICES

• Products like cruise ships, parking lots, hotels, and stadiums have several
characteristics that affect their pricing.
• First, the costs of building capacity are mostly fixed or sunk.
• these costs are very large relative to marginal costs
• firms in the industry typically face capacity constraints; that is, they can increase output
only up to capacity, but no further.
 NORMAL PRICING IN THIS INDUSTRY

• HOW MUCH CAPACITY TO BUILD

• LRMR>LRMC, build more capacity up to LRMR=LRMC

In revenue or yield management, we have to ignore sunk costs, thus use short run marginal
analysis:
• If MR > MC at capacity, then price to fill available capacity.
• If the lost profit from overpricing (unused capacity) is smaller than the lost profit from
underpricing (lower margins), then price higher than would fill capacity, and vice versa.
 WHAT IF DEMAND IS HARD TO PREDICT?

• To better match demand to available capacity, cruise ship managers often adjust prices up until the
time the ship sails. If it looks like capacity is going unused, they reduce price;and if it looks like
capacity will be more than filled, they raise price.
• But charging different prices to passengers who purchase at different times is costly for two reasons.
• First, if consumers realize that they may get a lower price if they wait to purchase, thenyou create an
incentive for them to wait.
• And this phenomenon makes it more difficult to match demand to capacity—the whole point of adjusting
price.
• To eliminate the late-booking incentive, many cruise line managers reduce price only slightly or reduce price
only by offering cabin upgrades, so that consumers don’t realize they’re paying less.
• In addition, there is another problem with adjusting price. Once some passengers realize they paid more than
their fellow passengers who booked at different times, they may become angry and demand a refund or
disparage the cruise line to future customers.
ADVERTISING AND PROMOTIONAL PRICING

• If promotional expenditures make demand more (less) price elastic, then you should
reduce(increase) price when you promote the product.
 PSYCHOLOGICAL PRICING

• prospect theory, which says that the way a decision is framed matters a great
deal to the decisions that consumers make. In particular,consumers tend to “feel”
losses more than gains, so that it makes sense to frame decisions or changes as gains
whenever possible.
• consumer concerns with fairness
• Home Depot did not charge more for building supplies in the wake of Hurricane Katrina
• vending machines don’t charge more as temperatures increase;
• or that hardware stores don’t raise prices for snow shovels when it snows