Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Chapter 4: Costing and Pricing rate vs. price price is more general, for example: Price = rate * weight Market Structure Models (Review of economics basics) Monopoly (one seller) vs. pure competition (many sellers, buyers and sellers small so no one influences prices or supply, homogeneous products, unrestricted entry) Oligopoly and monopolistic competition Relevant Market Area: Depending on the market area, examples of all 4 market structures may be found. For deregulation to work, the ideal structure was pure competition. Question was market entry. "Theory of contestable markets" compared participation of many sellers (of air transport) with "potential competition" (if there were no barriers and no economies of scale). Pages 103-4: Cost of service pricing: average cost, marginal cost, marginal revenue; Figures 4-1 and 4-2 are not on the test. Figures 4-3 and 4-4 are OK. Price at point where marginal cost = marginal revenue. Why? (Only if all costs are variable) Cost of Service Pricing Cost vs. activities: Separable costs: Directly assignable to activity (unit of output) Example: fuel and driver's time used on a single household moving van trip. Other examples: (from school, work, home)? 1 Common costs: Not obviously assignable to one activity, but may be allocated on some "reasonable" basis: dollars per mile, % of separable costs, % of sales. Common costs may be joint or nonjoint. Joint (if one unit of output is made, a by-product is also made which might incur more costs): spending 10 gallons to drive a truck from Ames to Des Moines actually means what? Providing one output means that a second output will also be provided. The example is the back-haul. Nonjoint: what portion of the airplane fuel and crew's time is accounted for by my suitcase? (None.) Yet all the passengers and luggage, combined, is moved by the common costs of fuel and crew. For budgeting, divide costs into fixed (over the short run--which means what?) and variable (those that increase with output). Note: there is some cross-over between fixed vs. variable and separable vs. common costs. We generally use fixed vs. variable. Examples of fixed costs: annual property taxes, salaries, interest on long-term loans, annual maintenance (due to time, not amount of use). Examples of variable costs: fuel, labor time, supplies used up by providing an output, replacement parts that wear out with increased use. Other examples of variable costs: renting facilities or equipment for a particular use (vehicle, ship, public warehouse); paying a freight bill; paying a garage for maintaining our vehicles. To "know your costs" for performing a given activity, would you prefer fixed or variable (or both) costs? Two more kinds of separable costs: marginal and out-of-pocket. Marginal: change in total costs for one more unit of output. 2 Out-of-pocket: as it sounds--costs incurred for a given unit of output--but may be applied too narrowly (what is the output-of-pocket cost of one more 10-lb. package) or too broadly (what is the out-of-pocket cost of one more trailer-load) to be useful. But is a reasonable, very short-term measurement of variable costs, and may be used to forecast cash flows. Railroads and pipelines: up to 50% of costs are fixed; would need to be paid regardless of number of railcars hauled. Motor carriers: 10% of costs are fixed. Water carriers: use public right-of-way, keeping fixed costs lower, but equipment investment is high. Similar to motor carriers. Airlines: public right-of-way and terminals. More like motor carriers. Value of service pricing = differential pricing (different prices for similar but different needs); Figure 4-5. Headhaul vs. backhaul; Figure 4-6. Figure 4-7 combines previous graphs into one. Cost Concepts (based on Appendix 4-A, pp. 140-148) 1. Money cost or accounting cost: a. Cash paid b. Allocated fixed costs 2. Economic costs: futuristic a. Opportunity costs b. Sunk costs 3. Social costs 3 Easiest to use? Example of cost calculations: Railroad from ISU to Boone Fixed costs Track, locomotive $10,000,000 Variable cost (per year) Car rental @ $400 per year: option 1: 50 cars per year option 2: 500 cars per year option 3: 1,000 cars per year option 4: 10,000 cars per year requires 2nd locomotive @ $2,000,000 What are (& graph each): 1. total costs 2. average costs 3. marginal costs Rate Making in Practice Tariffs: the publication showing the rates; a price sheet or rate sheet. General rates (for a variety of products) vs. Specific rates (as it sounds, for a particular haul or service) Older rate system: product classification, formerly published by Rate Bureaus (sometimes still used within states) 4 Now discounts from class rates, or exceptions to class rates, or separate commodity rates (for higher volumes, repeated shipments). Background: What if we had a general rate of $.05 per ton-mile? Is that more equitable than a rate of $250 per haul? (The latter is an example of a blanket rate, one type of specific rate.) Consider differences between points of service (33,000 shipping points in the U.S.), and in commodities being shipped (grain, flour, Ho-Ho's), and in demands for products. If all these differences were accounted for by individual shipping rates, there could be trillions of rates published (in a tariff). OK but awkward. Therefore, simplify: 1. Shipping and receiving points from 33,000 to only the most important; use a grid system. a. Measure distance from square to square (using the major shipping point as the basis in each); call this number the rate basis number. 2. Substitute "rates" for individual prices. A rate is expressed in dollars (or cents) per hundredweight (cwt). 3. Compare each commodity being shipped with a so-called "average" commodity, in terms of density, stowability, handling, liability. The average product gets a rating of 100 (or 100% of the normal or first-class rating). What would you say about a product with a rating of 45? How about 200? Examples: 1. You have a 10,000 pound shipment of Personal Effects of a Navy Admiral, with a released value between $.50 and 2.00 per pound (what does this mean?) to be shipped from Flint, Michigan to Columbus, Ohio. 5 a. What is the rate basis number (and what does this mean)? Use Table 4-2, p. 115. b. What is the class (and what does this mean)? Use Table 4-3, p. 116. c. What is the rate? Use Table 4-5, p. 119. d. What is the "price" (the amount of the freight bill)? What if you had 14,000 pounds of this item? Now you have plastic materials meeting the item 156300 description, in rolls measuring 9 feet in length 2 feet in diameter, to be shipped between two points 525 miles apart. The weight is 40,000 pounds. What is the freight bill? Use Table 4-3 and Table 4-5. You now have 4,000 pounds of reclaimed rubber, to be shipped from Akron, Ohio to Warren, Michigan. How much will you be charged? Use Table 4-6, p. 120. Rates under deregulation (p. 120) Rate bureaus, status of. Quote from p. 122: The product classification feature of the former class rate system will no doubt survive for some time to come. This system of describing and classifying products simplifies the entire product description processes for all carriers. Zip-code based rates. Mileage rates (example of $1.25) Special Rates (begins p. 122)—depends on character of shipment LTL, TL vs. weight groupings 6 Incentive rates: higher rate for the first 40,000 lb., lower rate for the remainder of a TL or CL multiple-car rates (RR) and Unit-train rates ($100,000) Per-car; per-truckload; per-containerload rates (e.g., $3,500) AQ similar to above Rates based on product density, or physical volume filled (air carriers) Similar: linear foot rule (motor carriers) Exempt shipment rates (piggyback, fresh fruit, air freight). Area, location, or route rates Local vs. Joint Proportional rates Differential rates (water-compelled (RR)—not much used mileage rates; (see p. 122) Terminal-to-terminal; ramp-to-ramp Blanket, group rates Time/service rate structures Contract rates: guaranteed minimum tonnage or percentage of total tonnage; also car-supply charge (may be monthly). Deferred delivery 7 Other rate structures Corporate Volume rates Discounts (e.g., 25-50% off class rates) Loading allowance Aggregate tender rates FAK Released value rates Two-way, 3-way rates (explain as back-haul rates) Spot market rates Menu pricing (pricing for “value-added” services) Pricing in Transportation Management Factors affecting (p. 128); “what market is forced to pay (in monopolistic situations).” ?! Why? Consider influence of other channel members, competitors, environment. Major pricing decisions--examples: 1. Specific pricing decisions: new service (FedEx) 2. modifying existing prices 3. responding to competitors (i.e., price leaders in an oligopoly). 8 How much to charge for transportation? If based on costs, use average or marginal costs. Pricing objectives: survival (airline examples--but marginal cost?) unit volume pricing (multiple cars, space available) profit maximization (but how do you know?) Demand curve skimming price (Concorde) market penetration (Ryan Air) sales-based pricing (follows life-cycle stages) market share objective social responsibility pricing objective (Cy-Ride). Estimating Demand and Costs: Consider price elasticity, economies of scale Surveys, test markets Pricing mistakes: prices too reliant on costs prices not revised with market changes ignore interaction with marketing variables (e.g., promotion) 9 one price for all. 10