PRICING Syllabus

Course Information

Course: MKT 6336.501 - Pricing

Meeting: Tuesday, 7 – 9:45 pm, Fall 2010
Classroom: SOM 2.107

Professor Contact Information

Instructor: Prof. Ashutosh Prasad TA:

Tel: (972) 883-2027 Tel.
E-mail: aprasad@utdallas.edu E-mail:
Office: SOM 3.221 Office:
Office Hours: Tuesday 4-7 pm or by appointment Office hours TBA

Course Pre-requisites, Co-requisites, and/or Other Restrictions

MKT 6301 or permission of the instructor

Course Description

Pricing is the element of the marketing mix that determines revenues and profits. However, even large
firms frequently do suboptimal pricing. This course will examine microeconomic, strategic and
psychological considerations in determining the correct pricing for products and services. It will cover
price-setting techniques in various monopoly and competitive situations. There are many different pricing
strategies - skimming, bundling, versioning, auctions etc. - that will be covered, together with a discussion
of the circumstances under which to use them. The course will use a combination of lectures, discussions
and exercises. It is an essential course for marketing managers and consultants.

Student Learning Objectives/Outcomes

- Students will understand and appreciate the role of pricing in the marketing mix.

- Students will learn methods for pricing goods and services contingent on product and market
characteristics to increase the profitability of the firm.

- Students will learn to incorporate quantitative methodologies to solving marketing problems

Required Textbooks and Materials

Power Pricing, by Robert Dolan and Herbert Simon. Publisher: Free Press 1996., $40.00

Course Syllabus Page 1

Cases
The case packet ($46.75) should be available from the UTD bookstore or Off-Campus Books. The HBS
cases contained are:

1. Atlantic Computer: A Bundle of Pricing Options

2. Cambridge Software Corporation
3. Virgin Mobile USA: Pricing for the Very First Time
4. Radiohead Music at your own Price

Overheads
PowerPoint slides can be downloaded as a zipped archive from the instructor’s webpage
(www.utdallas.edu/~aprasad/teaching.html). The tools to unzip it should be on your computer. If not, try 7-
zip (www.7-zip.org). The files are password protected and the password will be provided in class.

Assignments & Academic Calendar

Date Topics Readings / HW Due

Session 1 Introduction to pricing, Syllabus review Ch. 1, 2

Tue, Aug 24 Cost analysis, Break-even analysis

Session 2 Excel & CAS tutorial (CAS is for calculus by computer.

Tue, Aug 31 We describe Maxima maxima.sourceforge.net) Excel requires
a Solver add-in.)

Session 3 Demand curve, elasticity Ch. 3, 8

Tue, Sep 7 Monopoly pricing Handout on demand
elasticity

Session 4 Case: Atlantic Computer. Group 1 presents Case Report due

Tue, Sep 14 Product-line pricing

Session 5 Competitive pricing Ch. 3

Tue, Sep 21 Game theory

Session 6 Case: Radiohead Music. Group 2 presents Ch. 4

Tue, Sep 28 Conjoint analysis Case Report due

Session 7 Psychological pricing

Tue, Oct 5 Review

Session 8 Midterm Exam

Tue, Oct 12

Session 9 Price customization Ch. 5

Tue, Oct 19

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Session 10 Nonlinear pricing Ch. 7
Tue, Oct 26 Versioning

Session 11 Case: Cambridge Software Corporation. Group 3 Ch. 9

Tue, Nov 2 presents Case Report due
Bundling

Session 12 Dynamic pricing Ch. 10, 11

Tue, Nov 9 Pricing and promotion

Session 13 Case: Virgin Mobile USA. Group 4 presents Case Report due
Tue, Nov 16 Auctions

Session 14 Channels and delegation

Tue, Nov 23

Nov. 25-27 Thanksgiving

Session 15 Guest Lecture

Tue, Nov 30 Peer evaluation. Distribute take home final
assignment
Synopsis and Review

Dec 6, classes end for Fall semester. Dec 7-8 are reading days

Mon, Dec 6, 5PM, deadline for returning take-

home assignment to instructor‟s office SOM
3.221, or Tue, Dec 14, Final Exam.

Grading Policy

Activity Score
Case reports (4) 30%
Case presentation (1) 10%
Peer evaluation 10%
Midterm exam 25%
Final assignment or exam 15%
Attendance & CP 10%

Grading scale: A (90 and above), B (80 to 89), C (70 to 79), D (60 to 69) and F (less than 60).

Exam: Exams will consist of short answer and essay questions. Some may have a numerical
component. Sample questions from previous exams have been attached to the end of this syllabus.
The mid-term exam is closed book. Calculators, electronic dictionaries or other electronic devices
are not permitted. If the exam is missed due to emergency, a make-up exam will be scheduled if a
written request with documentary evidence is provided and approved. To deter unnecessary
absence, note that make-up exams can be more difficult. Depending on the instructor’s assessment
of class performance at the midterm, either a final exam or a final assignment will be announced.
Note that a final assignment is take-home and collaboration on it is not permitted.

Course Syllabus Page 3

 Case analysis: Case reports are due on the dates shown on the schedule, at the beginning of class.
Late submissions will not be accepted. The case reports and case presentation are group
exercises. Please submit one printed case report per group and also email a copy to the instructor.
The report should be a maximum of 10 double spaced pages. For case analysis, first identify the
decision problem then examine the issues involving: Company objectives and cost structures;
Customers and market demand; Competitors and Channel members. Then propose alternative
strategies (sometimes the case provides these, but there may be additional possibilities). Evaluate
the alternatives for their economic, qualitative and marketing implications. Finally, make a
decision. Recommend the plan of action, spell out the details, and conclude. (Note that all steps
may not be relevant to all cases and steps not listed above may be relevant.).

Your viewpoint should be that of the decision maker in the case because an important purpose of
case analysis is to give students the opportunity to make decisions with serious consequences. As
such, one would not expect to see in the report spelling or grammatical errors, inconsistency of
logic or restatement of case facts without analyzing them. It may be useful for your understanding
to organize data into a table or Excel chart. See if the case relates to any principle covered in
class or if the case is similar to another in some ways. At the end of the class you should expect to
get some take away lessons or ideas or concepts.

Presentation: The presenting team will get half an hour to convince the class of their analysis.
This includes 5-10 minutes for taking questions. Formal attire is not required, but a smart
appearance, good content and business-like tone are desirable. Practice will ensure a smooth
performance. Each group member should have some opportunity to speak.

Peer Evaluation: On the last day of class, please turn in a folded or sealed peer evaluation sheet
that should look something like this:

Scale 0 to 10 where 10 means contributed a lot and 0 means contributed nothing.

Group members Peer Evaluation Explain

1. Lisa (me) 7/10 Missed meetings…
2. Leo 10/10 …
3. Mona 8/10 …

The peer evaluation score for each person will be the average of their scores from each group
member, including themselves. Please let me know during the semester if there are problems
within the group; a remedy might include asking free-riding members to continue on their own.

Attendance & CP: Students are expected to attend all sessions and to have read and reflected on
the material to be covered in class. Regarding attendance, three absences are allowed without
penalty on days when there is no guest lecture. Else, subtract a point for each absence. Class
participation points will be noted from the quality of questions, response and during in-class
activities. Please avoid negative participation, e.g., distracting other students by surfing the web
on your laptop.

Course & Instructor Policies

Any grade dispute should be submitted in writing within one week of the assignment of the grade.

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Student Conduct & Discipline

The University of Texas System and The University of Texas at Dallas have rules and regulations for the orderly and
efficient conduct of their business. It is the responsibility of each student and each student organization to be
knowledgeable about the rules and regulations which govern student conduct and activities. General information on
student conduct and discipline is contained in the UTD publication, A to Z Guide, which is provided to all registered
students each academic year.

The University of Texas at Dallas administers student discipline within the procedures of recognized and established due
process. Procedures are defined and described in the Rules and Regulations, Series 50000, Board of Regents, The
University of Texas System, and in Title V, Rules on Student Services and Activities of the university’s Handbook of
Operating Procedures. Copies of these rules and regulations are available to students in the Office of the Dean of
Students, where staff members are available to assist students in interpreting the rules and regulations (SU 1.602, 972/883-
6391).

A student at the university neither loses the rights nor escapes the responsibilities of citizenship. He or she is expected to
obey federal, state, and local laws as well as the Regents’ Rules, university regulations, and administrative rules. Students
are subject to discipline for violating the standards of conduct whether such conduct takes place on or off campus, or
whether civil or criminal penalties are also imposed for such conduct.

Academic Integrity

The faculty expects from its students a high level of responsibility and academic honesty. Because the value of an
academic degree depends upon the absolute integrity of the work done by the student for that degree, it is imperative that a
student demonstrate a high standard of individual honor in his or her scholastic work.

Scholastic dishonesty includes, but is not limited to, statements, acts or omissions related to applications for enrollment or
the award of a degree, and/or the submission as one’s own work or material that is not one’s own. As a general rule,
scholastic dishonesty involves one of the following acts: cheating, plagiarism, collusion and/or falsifying academic
records. Students suspected of academic dishonesty are subject to disciplinary proceedings.

Plagiarism, especially from the web, from portions of papers for other classes, and from any other source is unacceptable
and will be dealt with under the university’s policy on plagiarism (see general catalog for details). This course will use the
resources of turnitin.com, which searches the web for possible plagiarism and is over 90% effective.

Email Use

The University of Texas at Dallas recognizes the value and efficiency of communication between faculty/staff and students
through electronic mail. At the same time, email raises some issues concerning security and the identity of each individual
in an email exchange. The university encourages all official student email correspondence be sent only to a student’s U.T.
Dallas email address and that faculty and staff consider email from students official only if it originates from a UTD
student account. This allows the university to maintain a high degree of confidence in the identity of all individual
corresponding and the security of the transmitted information. UTD furnishes each student with a free email account that
is to be used in all communication with university personnel. The Department of Information Resources at U.T. Dallas
provides a method for students to have their U.T. Dallas mail forwarded to other accounts.

Withdrawal from Class

The administration of this institution has set deadlines for withdrawal of any college-level courses. These dates and times
are published in that semester's course catalog. Administration procedures must be followed. It is the student's
responsibility to handle withdrawal requirements from any class. In other words, I cannot drop or withdraw any student.
You must do the proper paperwork to ensure that you will not receive a final grade of "F" in a course if you choose not to
attend the class once you are enrolled.

Student Grievance Procedures

Procedures for student grievances are found in Title V, Rules on Student Services and Activities, of the university’s
Handbook of Operating Procedures.

In attempting to resolve any student grievance regarding grades, evaluations, or other fulfillments of academic
responsibility, it is the obligation of the student first to make a serious effort to resolve the matter with the instructor,
supervisor, administrator, or committee with whom the grievance originates (hereafter called “the respondent”). Individual
faculty members retain primary responsibility for assigning grades and evaluations. If the matter cannot be resolved at that
level, the grievance must be submitted in writing to the respondent with a copy of the respondent’s School Dean. If the
matter is not resolved by the written response provided by the respondent, the student may submit a written appeal to the
School Dean. If the grievance is not resolved by the School Dean’s decision, the student may make a written appeal to the
Dean of Graduate or Undergraduate Education, and the deal will appoint and convene an Academic Appeals Panel. The
decision of the Academic Appeals Panel is final. The results of the academic appeals process will be distributed to all
involved parties.

Course Syllabus Page 5

 Copies of these rules and regulations are available to students in the Office of the Dean of Students, where staff members
are available to assist students in interpreting the rules and regulations.

Incomplete Grade Policy

As per university policy, incomplete grades will be granted only for work unavoidably missed at the semester’s end and
only if 70% of the course work has been completed. An incomplete grade must be resolved within eight (8) weeks from
the first day of the subsequent long semester. If the required work to complete the course and to remove the incomplete
grade is not submitted by the specified deadline, the incomplete grade is changed automatically to a grade of F.

Disability Services

The goal of Disability Services is to provide students with disabilities educational opportunities equal to those of their non-
disabled peers. Disability Services is located in room 1.610 in the Student Union. Office hours are Monday and Thursday,
8:30 a.m. to 6:30 p.m.; Tuesday and Wednesday, 8:30 a.m. to 7:30 p.m.; and Friday, 8:30 a.m. to 5:30 p.m.

The contact information for the Office of Disability Services is:

The University of Texas at Dallas, SU 22
PO Box 830688
Richardson, Texas 75083-0688
(972) 883-2098 (voice or TTY)

Essentially, the law requires that colleges and universities make those reasonable adjustments necessary to eliminate
discrimination on the basis of disability. For example, it may be necessary to remove classroom prohibitions against tape
recorders or animals (in the case of dog guides) for students who are blind. Occasionally an assignment requirement may
be substituted (for example, a research paper versus an oral presentation for a student who is hearing impaired). Classes
enrolled students with mobility impairments may have to be rescheduled in accessible facilities. The college or university
may need to provide special services such as registration, note-taking, or mobility assistance.

It is the student’s responsibility to notify his or her professors of the need for such an accommodation. Disability Services
provides students with letters to present to faculty members to verify that the student has a disability and needs
accommodations. Individuals requiring special accommodation should contact the professor after class or during office
hours.

Religious Holy Days

The University of Texas at Dallas will excuse a student from class or other required activities for the travel to and
observance of a religious holy day for a religion whose places of worship are exempt from property tax under Section
11.20, Tax Code, Texas Code Annotated.

The student is encouraged to notify the instructor or activity sponsor as soon as possible regarding the absence, preferably
in advance of the assignment. The student, so excused, will be allowed to take the exam or complete the assignment within
a reasonable time after the absence: a period equal to the length of the absence, up to a maximum of one week. A student
who notifies the instructor and completes any missed exam or assignment may not be penalized for the absence. A student
who fails to complete the exam or assignment within the prescribed period may receive a failing grade for that exam or
assignment.

If a student or an instructor disagrees about the nature of the absence [i.e., for the purpose of observing a religious holy
day] or if there is similar disagreement about whether the student has been given a reasonable time to complete any missed
assignments or examinations, either the student or the instructor may request a ruling from the chief executive officer of the
institution, or his or her designee. The chief executive officer or designee must take into account the legislative intent of
TEC 51.911(b), and the student and instructor will abide by the decision of the chief executive officer or designee.

These descriptions and timelines are subject to change at the discretion of the Professor.

Course Syllabus Page 6

 Question Bank for Pricing Midterm

The exam will be closed book and closed notes and will have 4-5 questions to be answered in 2
hours. Do not bring calculators or other electronic devices. We will provide enough blank pages in
the exam to write the answers. Please write legibly and answer in a clear and concise manner.
Structure the answers well and don‟t hesitate to use a list format and diagrams. Points may be taken
off for poor structure, grammar and spelling.

Q1. Explain the pricing methods called “markup on cost” and “markup on price.” Provide a
numerical illustration of each method. Why are they not considered optimal pricing methods?

Q2. Below is a set of prices and sales volume (thousands of units) for a monopolist software
provider in five test markets. The marginal cost is $1 per unit.
Price($) Units Sold
100 20000
120 15000
125 12000
138 10000
145 9000
Assume that the data describes a robust, linear relationship between sales and price. What
recommendation would you make to management regarding a national launch? State and
defend any necessary assumptions made. (Hint: Enter the data into a spreadsheet. Run a
regression to find the underlying demand curve. Then use calculus to find the optimal price.)

Q3. List 4 methods of demand curve estimation. Assume that you have access to five market
pundits. What questions would you ask them to (a) obtain the demand curve, and (b) obtain the
optimal price? (Hint: consider the decision calculus approach.)

Q4. What is meant by optimal pricing? Provide the formulas for profit and market share. What are
fixed costs and variable costs? What is meant by „marginal cost‟? Show how these costs enter
into the profit expression.

Q5. (a) What is the reservation price? (b) In value-in-use analysis, what is meant by economic value, reference
value and differentiation value? (c) Roxana wants to sell her 3-year old, 10000 miles, well equipped,
well maintained Toyota Camry car because she is moving to another country. She wants to
advertise it on Craigslist. How would you use value-in-use analysis to help her set a price for the
car?

Q6. Define Break Even volume. McBurger has decided to cut the price for Big Breakfast from $3.79
to $3.49. If the unit variable cost drops from $0.80 to $0.70, what is the minimal % increase in
sales necessary for a profitable price cut?

Q7. To the publisher it costs $10 to publish a book, and thereafter a margin of 10 dollars is added to
obtain the price at which the book is sold to the wholesaler. The wholesaler sets the wholesale
price to get a 40% margin on its cost. The retailer adds a 50% markup on price. What is the
retail price?

Q8. A monopolist charges price p for its product, whose marginal cost is c. Should the optimal price
increase, decrease or remain the same if:
(a) The firm becomes more efficient in production and lowers its marginal cost?
(b) The firm pays its CEO a one-time bonus of $10m ?
(c) A competitor enters the market?

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 (d) Consumers are willing to pay less because the economy takes a downturn? (Hint: Consider
two cases, one where the demand curve shifts down in a parallel manner, and the other
where it shifts to become steeper).
(e) The government starts to charge a 10% tax on every transaction?
(f) The government introduces a “cash for clunkers” type program where it offers to subsidize
10% of the price of the product to buyers (so that they pay only 90% of the price).
(One word answers like „increase‟ will be considered incorrect. Please provide supporting arguments.)

Q9. Explain the terms monopoly, oligopoly, pure competition and monopolistic competition, giving
an example of each.

Q10. (i) Define the elasticity of demand and cross-elasticity of demand. All else being equal, will the
optimal price be higher is the demand is more elastic or less elastic? (ii) A retailer sells 40 TVs
per week when it is priced at $250. If the elasticity for TV sales is 2, how many TVs per week
should sell if price is increased to $300? (iii) What is Market Structure analysis? What might a
table of elasticities and cross-elasticities look like in a 3-brand market where two brands
compete strongly with each other and weakly with the third?

Q11. (a) What are two implications for pricing in a market where there are price tiers (see book). (b)
What would the table of elasticities and cross-elasticities look like in a market where there are
distinct price tiers and when: (i) Price changes affect only brands in the same tier? (ii) Price
changes affect brands in the same and lower tiers?

Q12. In order to deal with competitive price cutting, some firms offer to match their competitors‟
price (similarly, they may offer to accept competitor‟s coupons). What do you think would be
the impact of these price-matching guarantees on profits and on prices in the industry?

Q13. Consider the pricing game shown below. Which of the following statements is false?

a. This game is known as a prisoners‟

dilemma. Firm A
b. Firm B does better to price low if
firm A prices high. Price HIGH Price LOW
c. Firm A‟s Nash equilibrium strategy is
Firm B Price HIGH (25, 25) (2, 50)
to price low.
d. The Nash equilibrium provides the
solution to the game. Price LOW (50, 2) (5, 5)
e. Firm A does best to price high
regardless of firm B‟s action.

Q14. What is the Prisoner‟s Dilemma game? Show the Nash equilibrium of this game. Why is a price
war sometimes called a prisoners‟ dilemma?

Q15. Speculate on the impact of the internet on competitive pricing decisions. Under what
circumstances would internet prices be lower or higher than offline prices? Would it be easier
to collude, or would price wars be more likely? If two brick-and-mortar stores each establish
an online presence, what impact would it have on their online and offline prices? (Rao et al.
2000 have a brief discussion on this topic.)

Q16. Consider a local software industry where two firms A and B initially price at $100/hr of
consultants‟ service. Variable costs are about $10 per hour. The new pricing manager of firm A

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 figures that her company should be the low-price competitor and sets the formula for the
company‟s price to be $7 below firm B‟s price (as long as it is profitable to do so). The
manager of firm B responds by making the assertion that his firm will match the competitor‟s
price. Tabulate the price reactions for several periods and find out what the equilibrium prices
will be.

Q17. A representative employee, Alexa, gave the following importance weights when asked to
allocate 100 points over the two attributes and then assign those points to levels within the
attributes, called part-worths.

Attribute Levels Part worth

Food item Pasta and meat sauce 40
40 points Turkey and Ham Sandwiches 20
Sausages and toast 0
Price $5.00 0
60 points $4.00 30
$3.00 60

Assume that ingredients have negligible cost. Now, answer the following questions:
(i). What is the most important attribute for Alexa? ______
(ii). How many product combinations are possible? ______
(iii). What is the most profitable product for us to offer Alexa? ______
(iv). Assume that Alexa has the choice of going to a nearby café and getting Turkey & Ham
sandwiches for $5.00. What then is the best product to offer Alexa ? (Decide on a choice
rule and find the probability of purchase and profitability.)
(v). We might assume that Alexa‟s tastes are representative of all the employees. However, this
is unlikely to be the case. What is needed to be modified in our methodology if we
interview 10 instead of just one employee?
(vi). What is the difference between self-explication and conjoint analysis?

Q18. (a) What are product complements and product substitutes? Provide 3 examples of each. How
should complements and substitutes be priced? (b) A seller sells printers and replacement ink
cartridges. The printers have a unit variable cost of $20. The demand curve for the printer is
DPRINTER = 1000 – 10 PPRINTER,
where PPRINTER is the printer price. A cartridge has a profit margin (price - unit variable cost) of
$5. A buyer of the printer usually buys about 10 replacement cartridges before shopping
around for a new printer. Thus, the demand for the cartridge is ten times the demand for the
printer. What price should the seller charge for the printer? Also calculate what the margin on
a cartridge should be for it to be optimal to give away the printer for free.

Q19. (a) Define Break Even volume. (b) Isabella is operating a Tex-Mex restaurant in Plano. She
calculates that her fixed costs are $60,000 per annum and that, on average, her margin per
customer (price minus unit variable cost) is $10. Not feeling happy with her current profits, she
is contemplating two alternative positioning strategies:
(i). Position the restaurant as a cheaper, fast food outlet. This would lower the fixed costs to
$40,000 but would also lower the margin per customer to $5.
(ii). Position the restaurant as a stylish, upscale dinner place. The fixed costs would increase
to $100,000 and the margin per customer would likely increase to $20.
Given this information, what would be your recommendation to her?

Q20. Consider the following demand functions for two firms 1 and 2:
D1 = 9 – 2 P1 + P2

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 D2 = 9 – 2 P2 + P1
where D denotes the demand and P the price. The marginal costs are zero. Find (i) the reaction
functions for the two firms and (ii) the equilibrium prices.

Q21. Lisa is thinking about joining an eating plan offered by her dorm for the semester. Without a
meal plan, a regular meal costs about $12. There are three alternative plans, with details given
below. Assume that Lisa eats in the dorm x times in a semester, which plan should she choose?
PLATINUM: One time fee of $1200, discount on each meal is 50%.
GOLD: One time fee of $720, discount on each meal is 33%
SILVER: One time fee of $450, discount on each meal is 25%

Q22. Jon and Rosa decide to quit their jobs with consulting firm ABC and start their own consulting
firm called JORO. They collected evaluations of the main attributes on which they will be
competing and decide to use value-in-use analysis to set a fee. The data they collected is
tabulated below. Based on their experience they assume the following:
All attributes are valued approximately equally by clients
A grade improvement on the rating scale is worth about $1000 to the client
Use value-in-use analysis to suggest a fee (1) by benchmarking against ABC and (2) by
benchmarking against the average.

Competitors Internal Policy Outsourcing Public Reputation Fee

Assessment Generation advice Relations
ABC 3 2 3 3 3 $15000

JORO 2 2 0 0 0 ?
(proposed)
PAM 2 3 2 0 2 $7500

ZYX 1 2 0 2 2 $5500

Rating Scale = 0 to 3 with 3 being excellent, 2 average, 1 poor and 0 not available.

Q23. (i) What is a reference price? Discuss three implications of reference price formation. (ii) Why
do sticker prices often end in the digit 9? (iii) What is the purpose of the MSRP listed on many
products?

Q24. Explain the key features of prospect theory with the help of a diagram. Describe three retail
pricing scenarios that illustrate the features of prospect theory. Explain why gains should be
segregated and losses integrated.

Course Syllabus Page 10

 Question Bank for Pricing Final

The exam is on chapters covered after the Midterm Exam. The exam is closed book and closed notes
and will have 4-5 questions to be answered in 2 hours. There will be enough blank space in the exam
to write the answers. Do not bring calculators or other electronic devices. Please write legibly and
answer questions in a clear and concise manner, providing illustrative examples where appropriate
and equations if necessary. Structure the answers well and don‟t hesitate to use a list format and
diagrams.

Q1. What are quantity discounts? Provide an explanation based on price discrimination for why firms
provide quantity discounts.

Q2. What is meant by „price discrimination‟? Provide explanations based on price discrimination for
why firms (i) distribute coupons, (ii) offer rebates and (iii) have sales.

Q3. What is meant by cannibalization in the context of price customization? Why is it a problem?
With examples from the marketing of software, discuss the four ways in which cannibalization can be
minimized (i.e., four ways to build fences).

Q4. What is the benefit of price customization? What are the fairness and legality concerns? Consider
a retailer of fashionable coats who sets their price at $300 at the beginning of the selling season and
after three months reduces their price to $150. Show, using a simple demand function, how the
ability to charge two prices instead of one, for different customer segments, can dramatically increase
profits for the firm.

Q5. (a) Distinguish between pure bundling, pure components and mixed bundling, providing
examples of each [1.5pt]. (b) List three separate explanations for why firms might sell bundles of
their products [1.5pt]. Then, with a numerical example, discuss in detail the demand side explanation
for bundling based on the negative correlation of willingness-to-pay for the different components by
different segments of consumers [1pt]. (c) Table 1 shows the willingness-to-pay for two optional
telephone features, Voicemail and Hotline, by four equal-sized segments. Obtain the optimal prices
for these features under (a) pure components, (b) pure bundling, and (c) mixed bundling. Variable
costs can be assumed to be negligible [3pt].

Table 1: Customer Valuations (in $)

Voicemail Hotline
Segment 1 22 3
Segment 2 15 15
Segment 3 15 15
Segment 4 3 22

Q6. Consider a pizza store that sells to three equal sized segments of consumers, labeled A, B and C.
The customers have a decreasing utility for every additional pizza purchased on a given purchase
occasion. Specifically, their willingness-to-pay for the first, second, third, fourth and fifth pizzas are
shown in the table below. (We assume only one type of pizza, in terms of size, crust and toppings to
keep things simple).

No. of pizzas Segment A Segment B Segment C

First $10.00 $11.00 $13.00
Second $7.00 $8.50 $11.00
Third $4.50 $6.50 $9.00

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 Fourth $3.00 $5.00 $7.00
Fifth $2.00 $2.50 $4.50

The marginal cost of a pizza is $1.00. Determine the optimal non-linear and uniform pricing
schedules. (Be sure to show intermediate steps, not just the final answer). How would you implement
the nonlinear pricing schedule?

Q7. What is meant by yield management? Explain why yield management systems used by airlines
result in ticket prices that increase as one gets closer to the flight date even though the airline runs
the risk of some seats going empty.

Q8. What is the “law of one price”? What can be a possible rationale for such a law? Give an
example of price dispersion that disproves this law.

Q9. List three reasons why retailers have sales [1.5pt]. With a numerical example, show that price
promotion cycles can occur based on the phenomenon of „potential build up‟ [2pt]. Next, discuss
why this explanation may not work if customers have expectations about when future sales will
occur. What should the retailer do to solve that problem [1pt]? List three reasons why some retailers
use EDLP, i.e., choose not to have sales [1.5pt].

Q10. What is an advantage of using an auction (say, for selling a valuable wine collection) over a
take-it-or-leave-it price [1pt]? Distinguish between English and Dutch auctions [2pt]. Discuss how
Filene‟s Basement (p.263) does its pricing and whether this is similar to an English auction or a
Dutch auction [1pt]. Discuss how auctions, particularly the second price sealed-bid auction (also
known as Vickrey‟s auction), can make bidders reveal their reservation prices [1pt]. What is meant by
the „winner‟s curse‟ [1pt]?

Q11. What is meant by „skimming pricing‟ [1pt]? Give details of the marketing of two products with
price skimming [2pt]. Argue that skimming is just a form of price discrimination [1pt]. With a
numerical (or graphical) illustration, show that skimming can be much more profitable than having a
fixed price point [2pt].

Q12. What is meant by „penetration pricing‟? Using examples such as software or luxury car pricing,
discuss the different circumstances under which penetration pricing should be used.

Q13. Describe three different forms of nonlinear pricing. Use graphs to plot the total price and per
unit price to the customer [1.5pt]. Explain the benefit and difficulty of having a nonlinear pricing
form with a large number of parameters [1pt]. Using cell phone service contracts as an example,
explain what “two part tariff” means and what a “menu of two part tariffs” means [1.5pt]. Using
pricing at entertainment parks as an example, numerically show that a two part tariff can be much
more profitable than charging a single price [2pt].

Q14. Explain peak load with demand shift pricing using the example of a hotel that has distinct peak
and off-peak seasons.

Q15. Explain why car dealers haggle with their customers over price but not grocery retailers.

Q16. Provide the rationale for tie-in sales using the example of IBM tying punch card and computer
sales. Also give two modern day examples.

Q17. What is a marketing channel [1pt]? What is meant by „double marginalization‟ [1pt]? What is the
impact of double marginalization on the price, sales and profit of the marketing channel as a whole

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[1pt]? Discuss two methods of channel coordination by which double marginalization can be reduced
[1pt].

Q18. List three reasons why manufacturers distribute coupons [1.5pt]. What is meant by the „face
value‟, „redemption rate‟ and „expiry date‟ of a coupon [1.5pt]? Explain how coupons can be used to
price discriminate (or, price customize) between shoppers [1pt]? What is meant by „loss-leader‟
pricing [1pt]? What is meant by „forward buying‟ (also known as pantry loading or purchase
acceleration) [1pt]?

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