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This Week's Topics: Review Class Concepts
This Week's Topics: Review Class Concepts
- Two-Part Tariff
- Simple
Review Homework
Practice Problems
Class Concepts – Simple Pricing
Steps for Solving a Simple Pricing Problem
- 1) Identify your total cost function (TC) and inverse demand function
- Find the inverse demand function by finding the demand function and solving for P
- Revenue = P*Q = (inverse demand function)*Q
- 2) Solve for marginal cost (MC) and marginal revenue (MR) by taking
derivatives of Revenue and Total Cost functions
- ** Be sure to do the last step! Optimal Simple Pricing helps you figure out the
most profit you can make from selling a good, given available demand. Is that
optimal profit high enough to cover your fixed costs?
Class Concepts – Advanced Pricing
Advanced Pricing
- Use price customization to sell the same good at different prices per unit
- Ideally, we would like to sell each unit at exactly the maximum willingness to
pay (WTP) of each customer. Since we don’t have enough information to do
this, we use the following types of customization:
- Two-Part Tariff
- Versioning
- Bundling
- If you have two unknowns in two equations, use algebra to solve for Q* 1 and Q*2
Other Considerations
- Arbitrage?: Since you are charging different prices to different customers, think
about the potential problems with arbitrage between customers in different
groups
- Step 2: Solve for MR and MC by taking derivatives of Revenue and Cost Functions
- MRS = 150 – 0.02QS MRA = 600 – 0.04QA
- Step 3: Set MR = MC
- 0.002QA +0.002QS + 10 = 150 – 0.02QS
- 0.002QA +0.002QS + 10 = 600 – 0.04QA
Class Concepts – Price Customization by Customer Type
Solution
- Solve for Unknowns
- 0.002QA +0.002QS + 10 = 150 – 0.02QS Simplify
- 0.002QA +0.022QS = 140 Equation 1
- Demand for High Type, Low Type Customers, these will be functions
- Total Cost (may be based on number of customers and number of units sold), this will
be a function of the number of customers & number of units