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Objectives of Firms
Profit Maximization
gap between total revenue and total cost should be greatest
Market Share
set price a little lower than competitors (combat cheap vs quality)
Price Setting and Cost Oriented Pricing
Markup has to cover all the selling costs and generate enough profit to cover other costs
Break-Even Point =
The number of unit sales at which total revenue equals total costs, resulting in neither profit nor loss. The break-even point in units can be calculated using the formula:
Breakeven point (units) =
Mixed Costs (or Semi-variable costs)
some costs have both fixed and variable components
For example, a utility bill might have a fixed base charge plus a variable charge based on usage
Separating these components can be complex
Step Costs
certain costs remain fixed up to a point but will increase in steps once a certain level of activity is reached
For example, if additional staff members are hired once a certain level of production is achieved, labor costs then become a “stepped” fixed cost, complication classification
Time Frame
the classification of costs can depend on the time frame considered
For instance, salaries might be considered fixed in the short term because employees draw the same salary each month but in the long term, these could vary based on business scale and needs, thus becoming more variable
Cost Allocation
allocating indirect costs such as administrative overhead, office supplies, or support services can be challenging as these costs are not directly attributable to a specific unit of production
Determining how to allocate these costs appropriately can complicate the differentiation
Economies of Scale
as production increases, some variable costs per unit might decrease due to economies of scale
conversely , some fixed costs can become variable if production scales up significantly and additional resources or expenses are needed
Revenue-Linked Costs
In some cases, costs might be linked to revenue rather than production levels
For example, sales commissions are typically tied to revenue and not strictly to the volume of units sold
Price Setting
use the existing market price
Higher price than nearest competitor
What does it signal about quality?
Lower price than nearest competitor
What does it signal about quality?
At or near price of nearest competitor
What about the competitors brand loyalty
Price Discrimination
defined as the practice of charging different prices to different customers for the same product or service, where the price differences are not justified by corresponding differences in cost
The strategy aims to capture consumer surplus and maximize a firm’s revenue by aligning prices more closely with individual consumer’s willingness to pay
In and of itself, there is not an issue with price discrimination
Price discrimination can sometimes cross into illegal territory if it violates antitrust laws, consumer protection regulations, or anti-discrimination laws
Price fixing, predatory pricing, discrimination based on protected characteristics, and price gouging
Price Discriminations Examples
Airline Tickets: Airlines often charge different prices for the same seat based on booking time, refund flexibility, and customer characteristics such as business vs. leisure travelers
Movie Theaters: Offer discounted tickets for students and senior citizens while charging full price for general admission
Software Licenses: Provide special pricing tiers for education institutions, students, and businesses
Price Discrimination in the Housing Market
The incidence of mis-selling, fraud, and poor customer service by retail banks is significantly higher in areas with higher proportions of poor and minority borrowers and in areas where government regulation promotes an increased quantity of lending
Specifically, low-to-moderate-income (LMI) areas targeted by the community Reinvestment Act have significantly worse outcomes, and this effect is larger for LMI areas with high-minority population share
The results highlight an unintended adverse consequence of such quantity-focused regulations on the quality of credit to lower-income and minority customers
