In many markets, it makes sense to charge different prices for very similar services and products. This so called price discrimination captures more value from a less price-sensitive segment and more sales volume from a more price-sensitive segment. We see price discrimination everywhere. A student or senior citizen discount is a price discrimination. A loyalty card discount is a price discrimination.
- In the last video, we saw that an airline…can maximize it's profit by analyzing the demand curve…into variable costs.…In that example, we learned that at 550 Franks,…the airline would sell 135 tickets.…In this video we'll go one step further…and calculate how much profit the firm can generate…by charging different prices…for basically the same service.…This tactic is called Price Discrimination,…and works well if, and when, different customers…show a different willingness to pay.…
In this chart, you can see that we have calculated…the best solution for setting one price.…But the chart indicates some problems…with charging a flat rate.…According to the demand curve, there are passengers…who are willing to pay more than 550 Franks,…and others will only pay less.…In other words, the area A is a potential profit…the airline does not capture at the price of 550 Franks.…Since only 135 tickets can be sold…at the price of 550 Franks,…most seats remain empty.…
So we need to find a way to sell those seats.…Area B shows that many potential passengers…
- What are customers buying? (demand theory)
- What should we produce? (production theory)
- Which costs do I need to worry about now? (cost theory)
- What market am I in? (competition theory)
- What should we charge for it? (pricing theory)
To understand what managerial economics looks like in practice, Stefan explains how Google's auction-based advertising system employs the principles of game theory and how understanding this can help decision makers to outmaneuver their competitors.
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- Using economics to solve business problems
- Understanding price elasticity
- Demand curve shifts
- Economics of scale vs. scope
- Break-even and what-if analysis
- Profit maximization
- Economics in action