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4 - Uniform Posted Price

Published online by Cambridge University Press:  05 June 2012

Rakesh V. Vohra
Affiliation:
Northwestern University, Illinois
Lakshman Krishnamurthi
Affiliation:
Northwestern University, Illinois
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Summary

In this chapter, we examine the issues associated with setting the same posted price for all buyers. The first is the trade-off between margin and volume. A high price means a high margin but a low sales volume. A low price means a low margin but a large sales volume. Somewhere between the two is a “sweet spot,” and it is natural to ask what that sweet spot depends on.

To think about the trade-off between margin and volume, it will be useful to ignore competition. Therefore, as we change our price we assume that the competition will not respond by changing its price, its offering, or both. Furthermore, to keep the arithmetic simple, we assume that the consumer surplus from buying a competitor's product is always zero. What is restrictive about this assumption is that the consumer surplus never changes. In effect, the competition does not lower its prices in response to us raising ours, or configuring its product differently. The economics shorthand for this assumption is that the firm setting prices is a monopoly. We will adopt this shorthand in the text that follows. The assumption, though drastic, allows us to focus on the interaction between the seller and buyers to the exclusion of other issues. (The consequences of dropping this assumption are examined in Chapter 7).

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Chapter
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Principles of Pricing
An Analytical Approach
, pp. 36 - 80
Publisher: Cambridge University Press
Print publication year: 2012

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