In the first part of this week, you were put in charge of an airline and had to choose a pricing strategy for your planes.
You have seen that even if alone on the market, choosing the prices that maximise profit was not obvious, considering that demand is hardly stable, with peaks and off-peak periods. Later on, you’ll deal with markets where you are competing with other airlines.
In the second part of the week, you’ve dealt with theoretical and practical aspects of price discrimination: consumer welfare has shown us that price discrimination is not always a bad thing for the customers. But it may not always be good either for them, depending on the range of prices and on the increase of the quantity offered on the market.
Price discrimination has many faces: it can be based on objective characteristics of the customers (third degree price discrimination), or more cleverly, on the self-selection by customers of slightly different products (second degree price discrimination). For a producer, product differentiation (different products and/or different qualities) and self-selection by customers according to their tastes are the most efficient way to achieve a successful strategy of price discrimination.
In order to choose the right prices for the right people, knowing the customers’ price sensitivity (measured by the elasticity) is essential. For instance, it is a good idea to get to know the customers who are not price sensitive, in order to offer them a ‘better’ product, closer to what they really like, and sell it to them at a high price.
Can any price do? Don’t they need to be somehow related to the costs of production? Bill Swan’s interview taught us that in the industries that we consider, costs are fixed in the short run, and prices should maximise revenues regardless of costs. In the long run, if revenues do not cover costs, then the overall strategy of the company has to be changed.
Do you want more?
Check the link below (See also section), and answer a fun quiz proposed by The New-York Times.
And in the Downloads section, you will still find the course bibliography, and the glossary of useful terms.
Note that further reading is optional, and not compulsory for completing the course.
Coming next week
Next week will start with a fun cartoon case about a magician willing to increase his revenues.
Then you will gain insight into practical application of pricing strategies based on revenue management.
Finally, you will be proposed a real-life, peer reviewed, case study, in which you will be asked to set up a new pricing strategy for a wildlife park!
© By ENAC - Nathalie Lenoir CC BY-NC-SA 3.0