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
Strategic Pricing: Theory, Practice and Policy Professor John W. Mayo [email protected] Raise your prices!!!! • ….Ugh? • Identify where you can do a better job than competitors of meeting customer needs • Shape products to dominate these segments • Manage cost and prices to maximize profit 2 • Identify value opportunities • How can we modify our products to create value to customers • Set priorities • To be a candidate for “performance pricing” product had to have strong competitive position • Align Price and Value • Document benefits from your product that accrue to customer • Get Cooperation • Communicate value to customer 3 Empirical Regularities in Pricing • Hosken and Reiffen (RAND, 2004) - Most prices stay at their modal price most of the time. Deviations are asymmetrical, with more down than upward pricing periods. • Kashyap (QJE, 1995) – nominal prices of catalog items often remain fixed for more than one year. Inflation is associated with more frequent price changes. Changes in price, when they do occur, are disparate. • Blinder (AER, 1991) Survey. If we had to pick a single abstraction to represent the whole economy, annual price changes (the median response) would appear to be the “right” model • Chevalier, et al (AER, 2003) – Behavior of prices in peak demand periods Source: Blinder (1991) Source: Blinder (2001) Hosken and Reiffen • Uses data from CPI surveys • 8400 items, 5 years, 20 product categories • Most products have a “regular” (high modal) price • When not at regular price p*, p<p* • But most price reductions are temporary • What is the strategic implication of this? Prices and Demand Chevalier, et al (AER 2003) • How do prices change with demand changes? • Competitive market theory suggests that price changes are non-negative to demand changes Competition, Prices and Demand Changes What happens to firm price when market demand Increases? $/q D0 D1 S P1 P0 Q0 Q1 q • But Imperfectly Competitive Models of Price responsiveness to demand suggest the possibility of counter-cyclical pricing Alternative models of counter-cyclical pricing • Because of fixed costs of search, consumers will be more responsive to prices during peak demand periods [ε increases] • Multi-round pricing models of tacit collusion suggest the probability of defection is highest in peak demand periods • “Loss-leader” models in which retailers compete for consumers via advertised prices Chevalier, Kashyap and Rossi (2003) • Examine retail prices of grocery store chain in Chicago, 1989-1997 • Data on retail transaction price, wholesale price, quantities and advertising, available at website • Seek to differentiate among theories of counter-cyclical pricing Methodology and Findings • Dominick’s Finer Foods - Items chosen include those with seasonal demands and nonseasonal product categories • Examine prices and their responsiveness to specific peaks demands [e.g., beer on July 4th, Tuna in Lent] • Find that prices for season items idiosyncratically fall with peak demands, NOT general demand elevations. HANDOUT • Conclusion: Loss-leader models best explain pricing patterns Pricing and Costs • How, in practice, do cost changes affect prices? • Consider the impact of minimum wage changes on prices in retail food outlets. • BLS field personnel collected prices during 19951997 for nearly 7,500 food items at over 1,000 different outlets. • Both “Limited Service” (LS) and “Full Service” (FS) outlets were surveyed 14 Retail Price changes at Retail Restaurants Percentage of items with unchanged price, bimonthly 1995–97 15 (Source: MacDonald and Aaronsen, Am. J. Ag. Econ. 2006) Minimum Wages and Retail prices • Aug 1996, President Clinton signed bill enacting minimum wage increases • Oct, 1, 1996 ($4.25 to $4. 75) • September 1, 1997 ($4.75 to $5.15) • Both geographic and industry differences in impact • Limited Service (LS) v. Full Service (FS) • Some states have own supra-federal minimum wage • Hawaii, Massachusetts, New Jersey, Oregon, Vermont, and Washington. Alaska, Connecticut, and the District of Columbia are constant % above federal. 16 Empirical Findings • Price Clusters and the Cluster of Price Changes • 1/8 of LS item prices ends in 99, >30% end in 9 • Twelve and three times those that would appear by random chance if all endings were equally likely. • 25% of all LS price changes are 10 cents • 50% of LS price change are 5, 10, 20, and 30 cents. • • Price Lags and Leads • Both leads and lags occur 17 Magnitude of Price Changes • Regression model • ΔP = f (PPI, MEALTYPE ,Pup, Pdown, MW) • Estimates: 1.56 % increase for 10% increase in minimum wage • Payroll = 25 % of sales in LS restaurants • Expected pass-through? • The Distribution of price changes • Not across the board changes • Outlets most often change prices of a few items • Which items? 18 Changing Market Structure and Prices: Northwest/Republic Merger Markup Relative to industry average prices (%) 40 NW or Rep NW + REP 30 20 NW or Republic + Other 10 NW +Rep + Other 1985 1986 1987 Source: S. Borenstein, AER, May 1990 Pricing in online markets • Suppose the price you pay to acquire a good for sales is $50. • A comparison site charges $.50 per click • You have other incremental costs of $3 per order shipped • The comparison site has a conversion rate of 5% • Prior experimentation indicates that your firm’s product has a price elasticity of -2. • What price do you charge? Pricing in online markets • Good news & bad news • Bad news: consumer search costs fall dramatically (optimal consumer search increases;, markets, product lives, prices move very rapidly • Good news: • “menu costs” of changing prices are reduced • changing prices/tactics can occur more quickly • Analysis: must be quicker • (Baye recommends Cournot (P – MC)/P = 1/(nε) rule of thumb