BA 100 Pricing and Price Discrimination

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