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Optimal Pricing and Revenue Strategies

This document discusses various concepts related to demand analysis and optimal pricing. It covers revenue maximization versus profit maximization, the pure selling problem, the optimal markup rule for pricing, price discrimination, and information goods. Revenue maximization aims to increase total sales volume while profit maximization focuses on increasing money earned after accounting for costs. The optimal markup rule indicates that markup should depend inversely on price elasticity of demand. Price discrimination involves charging different prices to different customer groups for the same good, even when costs are the same. Information goods have high fixed costs but low marginal costs of reproduction.

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Kaira Miguel
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81 views11 pages

Optimal Pricing and Revenue Strategies

This document discusses various concepts related to demand analysis and optimal pricing. It covers revenue maximization versus profit maximization, the pure selling problem, the optimal markup rule for pricing, price discrimination, and information goods. Revenue maximization aims to increase total sales volume while profit maximization focuses on increasing money earned after accounting for costs. The optimal markup rule indicates that markup should depend inversely on price elasticity of demand. Price discrimination involves charging different prices to different customer groups for the same good, even when costs are the same. Information goods have high fixed costs but low marginal costs of reproduction.

Uploaded by

Kaira Miguel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Demand

Analysis and
Optimal Pricing
Akky Dhane G. Pascual
Let's Talk
About
Maximizing Pure-Selling Optimal Markup
Revenue and Problem Rule on Pricing
Maximizing Profit

Price Information
Discrimination Goods
Revenue
Maximization
It is the theory that if you sell your
products at a low enough price, you
will increase the revenue you bring
in by selling a higher total volume of
goods.

Profit
Maximization
the goal of profit maximization is not
to increase the volume of goods
sold, but to increase the amount of
money earned from selling those
goods.
Pure Selling Problem
occurs when the firm faces a situation where maximizing profits and
maximizing revenues coincide or are equivalent

Examples:
A manufacturer must sell (or otherwise dispose of) an inventory of
unsold merchandise.

A professional sports franchise must set its ticket prices for its home
games.

An airline is attempting to fill its empty seats on a regularly scheduled


flight.
Optimal
Markup Rule is a formal expression of the conventional wisdom
that price should depend on both demand and

on Pricing
cost. The rule prescribes how prices should be
determined in principle.

markup rule, indicates that the size of the firm’s markup


depends inversely on the price elasticity of demand for a good
or service.
Setting MR = MC, we have P + P/Ep = MC. This can be
written as P - MC = - P/Ep and, finally, [P - MC]/P = -1/Ep,
the markup rule. Thus, the markup rule is derived from
and equivalent to
the MR = MC rule

Using this formula, the table lists optimal prices by


elasticity. Again, we see that greater elasticities imply
lower prices
Price
Discrimination
When a firm practices price
discrimination, it sets different prices for
different market segments, even though
its costs of serving each customer group
are the same. Thus, price discrimination
is purely demand based. Of course, firms
may also charge different prices for the
“same” good or service because of cost
differences. But cost-based pricing does
not fall under the heading of price
discrimination
Examples of Price
Discrimination
Airlines charge full fares to business travelers, while offering discount fares
to vacationers.
Firms sell the same products under different brand names or labels at
different prices.
Providers of professional services (doctors, consultants, lawyers, etc.) set
different rates for different clients.
Manufacturers introduce products at high prices before gradually dropping
price over time.
Businesses offer student and senior citizen discounts for many goods and
services.
Manufacturers sell the same products at higher prices in the retail market
than in the wholesale market.
Movies play in “first-run” theaters at higher ticket prices before being
released to suburban theaters at lower prices
Forms of Price Discrimination
First-degree (perfect) price discrimination occurs when a
firm sets a different price for each customer and by doing
so extracts the maximum possible sale revenue

Second-degree price discrimination occurs when the firm


offers different price schedules, and customers choose the
terms that best fit their needs

Third-degree price discrimination firms charge different


prices for different market segments for which the firm’s
costs are identical
Information
Goods
An information good can be a
database, game catridge, news
article, piece of music, software
or the like.
Information services ranges from
e-mail and instant messaging, to
electronic exchanges and
auctions, to brokerage and other
financial services, to job
placements
Information is costly to produce but cheap (often
costless) to reproduce (high fixed costs but low
or negligible marginal costs, so that average cost
per unit sharply declines as output increases).
Thank You!
References
file:///C:/Users/ASUS/Downloads/Managerial_Econo
mics_Textbook.pdf

https://www.boxstorm.com/articles/revenue-maximization-
vs-profit-maximization-which-is-the-better-strategy/

https://riccaboni.weebly.com/uploads/6/8/2/6/682657
9/me_slides.pdf

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