Table of Contents
Q.1. How is managerial economics related to different disciplines ? Also discuss the role of managerial economics in preparing managers to work effectively. (20)
Managerial economics has its relationship with other disciplines for propounding its theories and concepts for managerial decision making. Essentially it is a branch of economics. Managerial economics is closely related to certain subjects like statistics, mathematics, accounting and operations research.
1. Relationship with economics
The relationship between managerial economics and economics theory may be viewed form the point of view of the two approaches to the subject Viz. Micro Economics and Marco Economics. Microeconomics is the study of the economic behavior of individuals, firms and other such micro organizations. Managerial economics is rooted in Micro Economic theory. Managerial Economics makes use to several Micro Economic concepts such as marginal cost, marginal revenue, elasticity of demand as well as price theory and theories of market structure to name only a few. Macro theory on the other hand is the study of the economy as a whole. It deals with the analysis of national income, the level of employment, general price level, consumption and investment in the economy and even matters related to international trade, Money, public finance, etc.
2. Management theory and accounting
Managerial economics has been influenced by the developments in management theory and accounting techniques. Accounting refers to the recording of pecuniary transactions of the firm in certain books. A proper knowledge of accounting techniques is very essential for the success of the firm because profit maximization is the major objective of the firm.
Managerial Economics requires a proper knowledge of cost and revenue information and their classification. A student of managerial economics should be familiar with the generation, interpretation and use of accounting data. The focus of accounting within the firm is fast changing from the concepts of store keeping to that if managerial decision making, this has resulted in a new specialized area of study called “Managerial Accounting”.
3. Managerial Economics and Mathematics
The use of mathematics is significant for managerial economics in view of its profit maximization goal long with optional use of resources. The major problem of the firm is how to minimize cost, hoe to maximize profit or how to optimize sales. Mathematical concepts and techniques are widely used in economic logic to solve these problems. Also mathematical methods help to estimate and predict the economic factors for decision making and forward planning.
Mathematical symbols are more convenient to handle and understand various concepts like incremental cost, elasticity of demand etc., Geometry, Algebra and calculus are the major branches of mathematics which are of use in managerial economics. The main concepts of mathematics like logarithms, and exponential, vectors and determinants, input-output models etc., are widely used. Besides these usual tools, more advanced techniques designed in the recent years viz. linear programming, inventory models and game theory fine wide application in managerial economics.
4. Managerial Economics and Statistics
Managerial Economics needs the tools of statistics in more than one way. A successful businessman must correctly estimate the demand for his product. He should be able to analyses the impact of variations in tastes. Fashion and changes in income on demand only then he can adjust his output. Statistical methods provide and sure base for decision-making. Thus statistical tools are used in collecting data and analyzing them to help in the decision making process.
Statistical tools like the theory of probability and forecasting techniques help the firm to predict the future course of events. Managerial Economics also make use of correlation and multiple regressions in related variables like price and demand to estimate the extent of dependence of one variable on the other. The theory of probability is very useful in problems involving uncertainty.
5. Managerial Economics and Operations Research
Taking effective decisions is the major concern of both managerial economics and operations research. The development of techniques and concepts such as linear programming, inventory models and game theory is due to the development of this new subject of operations research in the postwar years. Operations research is concerned with the complex problems arising out of the management of men, machines, materials and money.
Operation research provides a scientific model of the system and it helps managerial economists in the field of product development, material management, and inventory control, quality control, marketing and demand analysis. The varied tools of operations Research are helpful to managerial economists in decision-making.
6. Managerial Economics and the theory of Decision- making
The Theory of decision-making is a new field of knowledge grown in the second half of this century. Most of the economic theories explain a single goal for the consumer i.e., Profit maximization for the firm. But the theory of decision-making is developed to explain multiplicity of goals and lot of uncertainty.
As such this new branch of knowledge is useful to business firms, which have to take quick decision in the case of multiple goals. Viewed this way the theory of decision making is more practical and application oriented than the economic theories.
7. Managerial Economics and Computer Science
Computers have changes the way of the world functions and economic or business activity is no exception. Computers are used in data and accounts maintenance, inventory and stock controls and supply and demand predictions. What used to take days and months is done in a few minutes or hours by the computers. In fact computerization of business activities on a large scale has reduced the workload of managerial personnel. In most countries a basic knowledge of computer science, is a compulsory programme for managerial trainees.
Role of managerial economics in preparing managers to work effectively
Successful mangers make good decisions, and one of their most useful tools is the methodology of managerial economics. Warren E Buffett, the renowned chairman and CEO of Berkshire Hathaway Inc., invested $100 and went on to accumulate a personal net worth of $30 billion. Buffett credits his success to a basic understanding of managerial economics. Buffett’s success is a powerful testimony to the practical usefulness of managerial economics.
Managerial economics has a very important role to play by helping managements in successful decision making and forward planning. To discharge his role successfully, a manager must recognize his responsibilities and obligations. There is a growing realization that the managers contribute significantly to the profitable growth of the firms.
A successful managerial economist must be a mathematician, a statistician and an economist. He must be also able to combine philosophic methods with historical methods to get the right perspective only then; he will be good at predictions. In short managerial practices with the help of other allied sciences.
We can conclude that managerial economics consists of applying economic principles and concepts towards adjusting with various uncertainties faced by a business firm.
Q.2. Write short note on the following : (10×2=20)
a. Uncertainty analysis
Certainty appears to be a theoretical and impractical state, as here the investor has perfect knowledge of the investment environment such that he is definite about the size, regularity and periodicity of flow of returns. Such situations may exist in the short-run (e.g. fixed deposit in a nationalised bank). However, long-run or long-range investments are not predictable as they are influenced by many kinds of changes taking place with time: political, economic, market and technology etc.
Risk is more common in the real world. A situation with more than one possible outcome to a decision such that the probability of each of these outcomes can be measured is a risk situation. For example, tossing of a coin (i.e. 50-50) or investing in a stock. The greater the number and range of outcomes, the greater is the risk associated with the decision or action. Uncertainty is a situation where there is more than one possible outcome to a decision but the probability of each specific outcome occurring is not known or even meaningful. This may be due to insufficient information or instability in the nature of variables. In extremes cases of uncertainty, the outcomes may itself be not clear. Decision making under uncertainty is necessarily subjective.
b. Concept of optimization
Optimum scale of production means the scale of output at which the long run average cost of production is minimum. As defined earlier this is the minimum efficient scale of production for the firm. If the optimum scale of output for any product is quite large and if the total market is can be efficiently served by a few firms, the new entrants will find it difficult to enter such markets. Examples of such markets are electricity generation and aircraft production.
Optimization techniques are very crucial activities in managerial decision-making process. According to the objective of the firm, the manager tries to make the most effective decision out of all the alternatives available. Though the optimal decisions differ from company to company, the objective of optimization technique is to obtain a condition under which the marginal revenue is equal to the marginal cost.
The first step in presenting optimization techniques is to examine the methods to express economic relationship. Now let’s have a look at the methods of expressing economic relationship −
• Equations, graphs, and tables are extensively used for expressing economic relationships.
• Graphs and tables are used for simple relationships and equations are used for complex relationships.
• Expressing relationships through equations is very useful in economics as it allows the usage of powerful differential technique, in order to determine the optimal solution of the problem.
Q.3. Discuss the effect of advertising on Demand. Substantiate your answer with suitable examples from hospitality field. (20)
Advertising influences our attitudes towards the product or service being promoted. In most cases, the intent of a firm’s advertising is to stimulate sales of a particular product or product line. When Pepsi Cola Corporation decides to sponsor a television show or cricket match it hopes that doing so will increase the sales of its products. Such product promotions have their impact on consumers through tastes and preferences.
In addition to shifting the demand function to the right, advertising may have the effect of making it somewhat more steep. The reason for this is that advertisements can create stronger consumer brand preferences, thus making consumers less sensitive to price changes for that product. This means that one effect of advertising can be to make the demand for a firm’s product more price- inelastic. To the extent that this is true, management has an increased ability to raise price without losing as many sales as would have been lost otherwise. We have seen that raising the product’s price will increase total revenue for the firm if demand is inelastic.
For example, a commercial for a fairly inexpensive good, such as a hamburger, may result in a quick bump in sales. On the other hand, advertising for a luxury item—such as an expensive car or piece of jewelry—may not see a payback for some time because the good is costly and is less likely to be purchased on a whim.
Q.4. What do you understand by the term ”Forecasting” ? Also analyse the different marketing approaches to demand measurement. (20)
Forecasting
Forecasting is a technique that uses historical data as inputs to make informed estimates that are predictive in determining the direction of future trends. Businesses utilize forecasting to determine how to allocate their budgets or plan for anticipated expenses for an upcoming period of time. This is typically based on the projected demand for the goods and services offered.
Investors utilize forecasting to determine if events affecting a company, such as sales expectations, will increase or decrease the price of shares in that company. Forecasting also provides an important benchmark for firms, which need a long-term perspective of operations.
Stock analysts use forecasting to extrapolate how trends, such as GDP or unemployment, will change in the coming quarter or year. The further out the forecast, the higher the chance that the estimate will be inaccurate. Finally, statisticians can utilize forecasting to analyze the potential impact of a change in business operations.. For instance, data may be collected regarding the impact of customer satisfaction by changing business hours or the productivity of employees upon changing certain work conditions.
Forecasting addresses a problem or set of data. Economists make assumptions regarding the situation being analyzed that must be established before the variables of the forecasting are determined. Based on the items determined, an appropriate data set is selected and used in the manipulation of information. The data is analyzed, and the forecast is determined. Finally, a verification period occurs where the forecast is compared to the actual results to establish a more accurate model for forecasting in the future.
Stock analysts use various forecasting methods to determine how a stock’s price will move in the future. They might look at revenue and compare it to economic indicators. Changes to financial or statistical data are observed to determine the relationship between multiple variables. These relationships may be based on the passage of time or the occurrence of specific events. For example, a sales forecast may be based upon a specific period (the passage of the next 12 months) or the occurrence of an event (the purchase of a competitor’s business).
Qualitative forecasting models are useful in developing forecasts with a limited scope. These models are highly reliant on expert opinions and are most beneficial in the short term. Examples of qualitative forecasting models include market research, polls, and surveys that apply the Delphi method. Quantitative methods of forecasting exclude expert opinions and utilize statistical data based on quantitative information. Quantitative forecasting models include time series methods, discounting, analysis of leading or lagging indicators, and econometric modeling.
Marketing Approaches to Demand Measurement
The vast majority of business decisions involve some degree of uncertainty and managers seldom know exactly what the outcomes of their choices will be. One approach to reducing the uncertainty associated with decision making is to devote resources to forecasting. Forecasting involves predicting future economic conditions and assessing their effect on the operations of the firm.
Frequently, the objective of forecasting is to predict demand. In some cases, managers are interested in the total demand for a product. For example, the decision by an office products firm to enter the home computer market may be determined by estimates of industry sales growth. In other circumstances, the projection may focus on the firm’s probable market share. If a forecast suggests that sales growth by existing firms will make successful entry unlikely, the company may decide to look for other areas in which to expand.
Forecasts can also provide information on the proper product mix. For an automobile manufacturer such as Maruti Udyog, managers must determine the number of Esteems versus Zens to be produced. In the short run, this decision is largely constrained by the firm’s existing production facilities for producing each kind of car. However, over a longer period, managers can build or modify production facilities. But such choices must be made long before the vehicles begin coming off the assembly line. Accurate forecasts can reduce the uncertainty caused by this long lead time. For example, if the price of petrol is expected to increase, the relative demand for Zens or compact cars is also likely to increase.
Forecasting is an important management activity. Major decisions in large businesses are almost always based on forecasts of some type. In some cases, the forecast may be little more than an intuitive assessment of the future by those involved in the decision. In other circumstances, the forecast may have required thousands of work hours and lakhs of rupees. It may have been generated by the firm’s own economists, provided by consultants specializing in forecasting, or be based on information provided by government agencies. Forecasting requires the development of a good set of data on which to base the analysis. A forecast cannot be better than the data from which it is derived. Three important sources of data used in forecasting are expert opinion, surveys, and market experiments.
Q.5. Differentiate between accounting cost and economic costs. Also discuss the significance of opportunity cost in managerial decision- making. (20)
Difference between Accounting Cost & Economic Cost
Accounting cost means the expenses incurred by the firm on production and sale of goods or service. These are paid by the firm to the outsiders. For example, payment made for wages, raw materials, fuel, power, building etc. are the accounting costs. Accounting cost is the money paid for contractual payments. It includes payments and charges made by the enterprise to the suppliers of resources. It is the explicit cost.
But economic cost includes not only explicit cost but also implicit or imputed cost. Implicit cost includes rent charged on owned premises, interest charged on owned capital, wages paid to entrepreneur etc. Implicit cost is not included in accounting cost.
• Accounting cost includes only explicit costs which are recorded in the books of account. Implicit cost will not be recorded in the books of account. Thus the economist’s concept of cost is more comprehensive as compared to accountant’s concept of cost.
• Accounting cost are generally used for financial reporting and control. Economic costs are used for decision-making.
• In short, accounting costs involve only cash payments made by the entrepreneur. On the other hand, economic costs include all these accounting costs plus the implicit cost.
Opportunity Cost
Opportunity cost is the value of a resource in its next best use. It‘s the cost for the next best alternative use. The opportunity cost is really meaningful in the decision making process. Sometimes this opportunity cost, are called as alternative cost.
Opportunity is the outcome of scarcity. An opportunity cost is the value of the second best alternative that is forgone when a choice is made. In other words, opportunity cost can be defined as the benefits that could have been received if other alternative choice was made.
As there are alternative uses of scarce economic resources, need arises to select the best way to use these resources (say land, labour and capital). When one alternative is chosen over other, the next best alternative which is forgone is called opportunity cost of making a choice, because we give up the opportunity to have other desirable things.
The opportunity cost of the value of opportunity lost is taken into consideration when alternatives are compared. It measures the benefit of opportunity forgone.
Therefore, concept of opportunity cost are helpful in managerial economics in evaluating the various alternatives available when scarce economic resources are employed for various uses.
Q.6. What is Short-Run Cost Analysis ? Explain the various economics of scale. (20)
Short Run Cost Analysis
A firm’s cost of production will depend on the inputs it uses. Further, use or employment of an input depends on the length of time. In other words, cost of production will vary depending on the production period. Production may be conducted on a short run or on a long rim basis. In view of this, inputs employed by a firm may be fixed and variable.
Short run is that period of time over which at least one input is held fixed. In the short run, the firm cannot change its fixed input to expand output. Only by varying variable inputs can a firm change its volume of output. Thus, in the short run, total cost (TC) is divided into two broad components: total fixed cost (TFC) and total variable cost (TVC).
Thus TC = TFC + TVC where TFC = PK K̅ = rK̅ and TVC = PL.L = w.L. Here we have put bar sign over K since it is assumed to be fixed (in the short run).
Total Fixed Cost (TFC)
A firm in the short run uses both fixed inputs and variable inputs. Costs that arise due to the use of fixed inputs are called fixed costs or overhead costs or unavoidable costs. It is the cost of the firm’s fixed inputs. Whether a firm produces or not it will have to incur fixed cost.
Thus, fixed cost is independent of the level of output. Whatever be the level of output (even if zero), fixed costs do not change. Thus fixed costs are sunk costs. This is shown in Fig. 3.12(a) where TFC curve has been drawn parallel to the horizontal axis on which we measure output. It is clear from the figure that the firm incurs a total fixed cost of OA, whether it produces or not.
Fixed costs or supplementary costs or overhead costs are:
a. Expenses for municipal rent on land,
b. Salaries of top officers
c. Interest on borrowed funds,
d. Depreciation of machine, and
e. Capital cost of computer, etc. Fixed costs are sometimes called indirect costs or overhead costs.
Total Variable Cost (TVC)
Costs that arise due to the use of variable factors are called variable costs or direct costs or prime costs. It is the cost of the firm’s variable inputs. If the firm does not produce, it need not use variable inputs. Thus, when no output is produced, variable cost is zero.
Total variable costs include costs of:
a. Raw materials
b. Wages of daily wage-earners
c. Transport cost
d. Cost of packaging
e. Electricity and other energy-related costs
f. Tariff
Total Cost (TC)
Total cost is the sum total of fixed and variable costs. TC curve in the short run starts from that point wherefrom the TFC curve starts. This means that total cost includes only fixed cost when output is zero.
Various Economies of Scale
Economies of scale are cost reductions that occur when companies increase production. The fixed costs, like administration, are spread over more units of production. Sometimes the company can negotiate to lower its variable costs as well.
Types
There are two main types of economies of scale: internal and external. Internal economies are controllable by management because they are internal to the company. External economies depend upon external factors. These factors include the industry, geographic location, or government.
1. Internal Economies of Scale
Internal economies result from a larger volume of production. It is commonly can be seen in large organizations.
For example, large companies can buy in bulk. This economy lowers the cost per unit of the materials they need to make their products. They can use the savings to increase profits. Or they can pass the savings to consumers and compete on price.
There are five main types of internal economies of scale.
a. Technical economies
Technical economies of scale result from efficiencies in the production process itself. Manufacturing costs fall 70% to 90% every time the business doubles its output.2 Larger companies can take advantage of more efficient equipment.
For example, data mining software allows the firm to target profitable market niches. Large shipping companies cut costs by using super-tankers. Finally, large companies achieve technical economies of scale because they learn by doing. They’re far ahead of their smaller competition on the learning curve.
b. Monopsony power
Monopsony power is when a company buys so much of a product that it can reduce its per-unit costs. For example, Wal-Mart’s “everyday low prices” are due to its huge buying power.
c. Managerial economies
Managerial economies of scale occur when large firms can afford specialists. They more effectively manage particular areas of the company. For example, a seasoned sales executive has the skill and experience to get the big orders. They demand a high salary, but they’re worth it.
d. Financial economies
Financial economies of scale mean the company has cheaper access to capital. A larger company can get funded from the stock market with an initial public offering. Big firms have higher credit ratings. As a result, they benefit from lower interest rates on their bonds.
e. Network economies
Network economies of scale occur primarily in online businesses. It costs almost nothing to support each additional customer with existing infrastructure. So, any revenue from the new customer is all profit for the business. A great example is eBay.
2. External Economies of Scale
A company has external economies of scale if its size creates preferential treatment. That most often occurs with governments.
For example, a state often reduces taxes to attract the companies that provide the most jobs. Big real estate developers convince cities to build roads to support their buildings. This government building saves developers from paying those costs. Large companies can also take advantage of joint research with universities. This partnership lowers research expenses for these companies.
Small companies can cluster similar businesses in a small area. That allows them to take advantage of geographic economies of scale. For example, artist lofts, galleries, and restaurants benefit by being together in a downtown art district.
Q.7. Write an essay on ”Types of Statistical Analysis”. (20)
Types of Statistical Analyses
Once a functional form of a production function is chosen the next step is to select the type of statistical analysis to be used in its estimation. Generally, there are three types of statistical analyses used for estimation of a production function.
These are:
1. Time series analysis
The amount of various inputs used in various periods in the past and the amount of output produced in each period is called time series data. For example, we may obtain data concerning the amount of labour, the amount of capital, and the amount of various raw materials used in the steel industry during each year from 1970 to 2000.
On the basis of such data and information concerning the annual output of steel during 1970 to 2000, we may estimate the relationship between the amounts of the inputs and the resulting output, using regression techniques.
Analysis of time series data is appropriate for a single firm that has not undergone significant changes in technology during the time span analysed. That is, we cannot use time series data for estimating the production function of a firm that has gone through significant technological changes.
There are even more problems associated with the estimation a production function for an industry using time series data. For example, even if all firms have operated over the same time span, changes in capacity, inputs and outputs may have proceeded at a different pace for each firm. Thus, cross section data may be more appropriate.
2. Cross-section analysis
The amount of inputs used and output produced in various firms or sectors of the industry at a given time is called cross-section data. For example, we may obtain data concerning the amount of labour, the amount of capital, and the amount of various raw materials used in various firms in the steel industry in the year 2000. On the basis of such data and information concerning the year 2000, output of each firm, we may use regression techniques to estimate the relationship between the amounts of the inputs and the resulting output.
3. Engineering analysis
In this analysis we use technical information supplied by the engineer or the agricultural scientist. This analysis is undertaken when the above two types do not suffice. The data in this analysis is collected by experiment or from experience with day-to-day working of the technical process. There are advantages to be gained from approaching the measurement of the production function from this angle because the range of applicability of the data is known, and, unlike time series and cross-section studies, we are not restricted to the narrow range of actual observations.
Q.8. What do you mean by perfect competition and monopoly ? What would be the effect of technological change in the long-run under perfect competition? (20)
Perfect Competition
Perfect competition is a form of market in which there are a large number of buyers and sellers competing with each other in the purchase and sale of goods, respectively and no individual buyer or seller has any influence over the price. Thus perfect competition is an ideal form of market structure in which there is the greatest degree of competition.
Perfect Monopoly
Monopoly can be described as a market situation where a single firm controls the entire supply of a product which has no close substitutes.
Though perfect competition and monopoly are the two extreme cases of market structure, they both have one thing in common – they do not have to compete with other individual participants in the market. Sellers in perfect competition are so small that they can ignore each other. At the other extreme, the monopolist is the only seller in the market and has no competitors. The market or industry demand curve and that of the individual firm are the same under monopoly since the industry consists of only one firm.
Effect of technological change in the long-run under perfect competition
Technological change will have an impact on all organizations. There will be a need for new types of managerial, diplomatic, and social skills and a concomitant need for a new type of decision making process that will not be accommodated by existing organizational structures.
Three particular aspects of the organizational environment will be affected by technological change: the amount of market competition and uncertainty will increase; there will be requirements for more diversity and higher quality in the organization’s products or services; and external politics and legislative reform will increase in complexity. Each of these changes will provoke responses from the organization in its structure and relationships with employees and customers.
Technological change will force changes in basic managerial functions. There will be increased responsibility on management for organization outcomes leading to added emphasis on planning, decision making, control, and coordination. These will often rely on computer-based management science techniques which demand a higher intellectual capability of managers. This will produce strain on managers and other individuals, potentially affecting morale, productivity, and output.
Technological change can positively affect individual values leading to increased time for consideration of both the heart and the brain in decision making. This may lead to greater moral sensitivity and more tolerance and compassion for others, all coupled with a more rational approach to decision making. A possible effect of technological change may be increased loyalty to one’s profession rather than to one’s organization. The effect of technological change on the manager’s quest for self-actualization is still debatable.
The net result of technological change for all organizations is a greater requirement for strategic planning. All of us must continually ask the question “What do we have to do now to attain our objective tomorrow?” Through this process we can anticipate changes, including those brought about by technology, evaluate the various alternatives available to us to cope with those changes, and be prepared for the future as it arrives.
Q.9. How many options does an amusement park have when it comes to the pricing decision ? Elaborate with suitable examples. (20)
Pricing decision in Amusement Parks
1. Premium pricing
It is a type of pricing which involves establishing a price higher than your competitors to achieve a premium positioning. Amusement park can use this kind of pricing when the product or service presents some unique features or core advantages, or when the company has a unique competitive advantage compared to its rivals.
2. Penetration pricing
It is a commonly used pricing method amongst the various types of pricing is designed to capture market share by entering the market with a low price as compared to the competition. The penetration pricing strategy is used in order to attract more customers and to make the customer switch from current brands existing in the market. The main target group is price sensitive customers. Once a market share is captured, the prices are increased by the company.
However, this is a sensitive strategy to apply as the market might be penetrated by yet another new entrant. Or the margins are so low that the company does not survive. And finally, this strategy never creates long term brand loyalty in the mind of customers. This strategy is used mainly to increase brand awareness and start with a small market share.
3. Economy pricing
This type of pricing takes a very low cost approach. Just the bare minimum to keep prices low and attract a specific segment of the market that is highly price sensitive. Examples of companies focusing on this type of pricing include Walmart, Lidl and Aldi.
4. Skimming price
Skimming is a type of pricing used by companies that have a significant competitive advantage and which can gain maximum revenue advantage before other competitors begin offering similar products or substitutes. It can be the case for innovative electronics entering the marketing before the products are copied by close competitors or Chinese manufacturers.
After being copied, the product loses its premium value and hence the price has to be dropped immediately. Thus, to get maximum margins from their products, innovative companies keep launching new variants so that customers are always in the discovery phase and paying the required premium.
5. Psychological pricing
It is a type of pricing which can be translated into a small incentive that can make a huge impact psychologically on customers. Customers are more willing to buy the necessary products at $4,99 than products costing $5. The difference in price is actually completely irrelevant. However, it makes a great difference in the mind of the customers. This strategy can frequently be seen in the supermarkets and small shops.
6. Neutral strategy
This type of pricing focuses on keeping the price at the same level for all four periods of the product lifecycle. However, with this type of strategy, there is no opportunity to make higher profits and at the same time, it doesn’t allow for increasing the market share. Also, when the product declines in turnover, keeping the same price effects the margins thereby causing an early demise. This pricing is used very rarely.
7. Captive product pricing
It is a type of pricing which focuses on captive products accompanying the core products. For example, the ink for a printer is a captive product where the core product is the printer. When employing this strategy companies usually put a higher price on the captive products resulting in increased revenue margins, than on the core product.
8. Optional product pricing
It can be frequently observed in the case of airline companies. For example, the basic product of KLM Airlines is offering or providing seats in the airplane for different flights. However, once the customers start purchasing these seats, they are offered optional features along with the seats. Examples may be extra seat space, more drinks etc. Because of this optional product, there is more revenue generated from the main product. Customers are willing to spend for the optional product as well.
9. Bundling price
In the supermarket, when two different products are combined together such as a razor and the lotion for shaving, and they are offered as a deal, then we get to experience the bundling type of pricing first hand. This strategy is mainly used to get rid of excess stocks.
10. Promotional pricing strategy
It is just like Bundling price. But here, the products are bundled so as to make the customer use the bundled product for the first time. This type of pricing focuses on buying one, and getting a new type of product for free. Promotional pricing can also serve as a way to move old stock as well as to increase brand awareness.
Q.10. Write short notes on the following: (10×2 =20)
a. Two part tariffs
One of the techniques requires buyers to pay a fee for the right to purchase their product and then to pay a regular price per unit of the product. For example, your cable TV company charges you a base fee for hooking into its system and then charges you extra for pay-by-view transmissions. Similarly, many local telephone companies charge a monthly base fee and then charge additional fees based on message units.
The fee for privilege of service plus prices for services consumed is called a two- part tariff. Theme parks such as Disney World usually employ such a pricing scheme to increase their profits
A two-part tariff is often a good way to increase profit by extracting some, but not all, of the consumer surplus from a monopolist’s clients. A two-part tariff is often a good way to increase profit by extracting some, but not all, of the consumer surplus from a monopolist’s clients. Monopolists usually experiment with various two-part tariff pricing schemes before hitting on the one that gives them maximum profit.
b. Pure bundling and Mixed bundling
Pure bundling
In it products are sold only as bundles. This is not an exhaustive list but covers the most frequently encountered cases. Pure bundling involves selling two products only as a package and not separately.
For example, Reliance WLL -cellphone instrument (handset) and connection are only available together and not available separately. Microsoft’s bundle of Windows and Internet Explorer could be considered a pure bundle. Also Cable TV Channels are an example of pure bundling. In North America it is not possible to get only Disney Channel has it is always bundled with other premium channels. In India, the prospective CAS(Conditional Access System) also has similar channel packages where some of the channels can’t be purchased separately like Zee TV, would only be available with other, Zee Channels.
Mixed-bundling
In it products are sold both separately and as a bundle.
Mixed Bundling involves selling products separately as well as a bundle.
For eg – McDonald’s Value Meals and Microsoft Office are examples of Mixed Bundling. In a recently introduced offer, The Times of India and The Economic Times can be purchased together for weekdays for a price much less than if purchased separately. This is also an example of mixed bundling. In most cases mixed bundling provides price savings for consumers.