Charging Price Research Articles

Sluggish Consumers: An Evolutionary Solution to the Bertrand Paradox

We consider an evolutionary model where sellers charge prices for a homogeneous commodity and where consumers, while incompletely informed about prices, decide from which seller they buy the commodity. Sellers revise their decisions by way of imitation and experimentation and consumers engage in search. Consumers are sluggish if they do not learn sellers' prices with some positive probability. Only if consumers are not sluggish at all does economic evolution unambiguously support Bertrand equilibrium. If consumers are sluggish, firms charge other prices as well and the evolutionary process displays a property similar to parallel pricing. If consumers are extremely sluggish, evolution picks up monopoly pricing. Journal of Economic Literature Classification Numbers: C7, D43, D83, L13.

Can differential prices be fair?

In September 2000, Amazon.com attempted to implement a differential pricing structure that would track online purchasing behaviors to charge loyal customers higher prices for the same product. Amazon’s customers met this new pricing initiative with extreme displeasure, forcing the company to end its trial with differential pricing. Differential pricing is not new. Industries such as travel and retail have charged consumers different prices for years through special promotions such as frequent flyer miles and loyal customer discount cards. Why is it then that Amazon’s customers perceived the company’s differential pricing structure as being unfair? More importantly, are there times when such pricing is acceptable? An understanding of the concepts of distributive and procedural justice, as well as equity theory and dual entitlement, provides managers with the defining principles of price fairness. Implementing these concepts and theories into the firm’s pricing practices will increase the likelihood that customers will perceive differential pricing as being fair.

Seeing Through the Snow: Is Canada's Government, or its Weak Economy, Responsible for Low Drug Prices?

Conventional wisdom maintains that pharmaceutical prices in Canada are low, in comparison to the United States, because of government price controls administered by Canada's Patented Medicine Prices Review Board (PMPRB). But a careful examination of the economics of Canada's pharmaceutical market reveals that the nation's low branded-drug prices are chiefly the result of Canada's low standard of living relative to the United States and pharmaceutical companies' marketing response to Canada's declining incomes. Moreover, higher legal liability costs in the United States account for about one-third to one-half of the price difference for patented pharmaceuticals between Canada and America. If anything, the PMPRB has probably raised Canadians' drug prices because it discourages patented drug manufacturers from using price reductions as a competitive strategy. This allows manufactures of generics to charge prices in Canada that are significantly higher than in the United States, and insulates the manufacturers from price competition.

Prices for long-distance voice telephony in Germany

This paper examines the first 16 months of competition in the German market for long-distance voice telephony on the fixed network. It concentrates on price level and price structure. Competition induced by the entry of both network operators and switch-based service providers decreased the price level substantially. Furthermore, after initial attempts to design innovative price structures, most firms gave up differentiation, and instead charged uniform prices for long-distance calls for residential customers. Moreover, the decrease in the price level seems to have induced a shift in the peak-load structure, which raises concern about the regulation of the peak-load structure of interconnection charges.

Price Discrimination, Economies of Scale, and Profits

The debate in economics about whether third-degree price discrimination by a firm with monopoly power is socially beneficial or not has gone on a long time. In fact, the debate goes back to Pigou (1920) and Robinson (1933). Two main reasons why third-degree price discrimination affects welfare are the fact that different groups of buyers are charged different prices leads to a misallocation of output and the total output under price discrimination may differ from total output under uniform pricing. Schmalensee (1981), Varian (1985), and Schwartz (1990) show that welfare falls if total output is the same or lower under price discrimination than under uniform pricing. That is, in order for price discrimination to yield a higher welfare, a necessary but insufficient condition is that total output be higher under price discrimination. In this connection, Hausman and Mackie-Mason (1988) argue that price discrimination is most beneficial when there are economies of scale. On the other land, Layson (1994) shows that it is possible for economies of scale to decrease the welfare gains from price discrimination rather than increase them.

Role of Market Turbulence in Shaping Pricing Strategy

Several authors have highlighted the need for research into the strategy of firms operating in turbulent markets, characterized by both environmental complexity and uncertainty, which typify the “high technology” firms of today. Similarly, while pricing is a major marketing decision problem faced by managers in these high technology industrial firms, relatively little research is available that addresses the issues that lead to the choice of one pricing strategy over another. We examine three broad pricing problems: (1) pricing over the product life cycle; (2) use of reference price; and (3) firm's tendency to offer as well as charge price premiums. We test our theory-driven hypotheses through a research study conducted on a national industry sample of purchasing managers. Our research integrates the evidence available from consumer-level pricing research, and results in several important implications for managers of high technology industrial firms which we also outline.

What's the Globe Good For?

I saw two plays at the Globe last summer. I'd done a little work for the in-house magazine, and as my reward, I was given two house seats to whatever was on for the brief period of my stay in London. It turned out to be The Maid's Tragedy and A Chaste Maid in Cheapside. For both productions the seats were in the second row of the lowest gallery, about two thirds of the way around the circle-eight o'clock on a watch dial. My guest and I rented cushions, for ?1 each, to mitigate the authenticity of the wooden benches, reminding ourselves that cushions were authentic, too; in fact they felt a little too authentic. The cramped legroom was more ominous; had we been an authentic five feet tall, like the putative Globe playgoer, perhaps we wouldn't have minded. I've spent forty years explaining to students that it didn't matter where you sat in a theater like the Globe; it was basically an auditorium, where what mattered was the acoustics. Sitting in the center was no better than sitting on the sides because on a thrust (rather than proscenium) stage, the actors wouldn't have played only to the center. I will now stop saying this; it is an egregious error, as is the implied assumption that acoustics aren't a problem in such a theater. From our vantage point, the pillar, as we could see even before the play began, was a problem. I should emphasize that our seats were not said to have impeded views, and if we had bought our tickets, we would have been charged full price for them-?22 each. In fact the actors in the 1996 performances at the Globe, Peter Hall's troupe from the Old Vic, had complained particularly about the pillars, even to the point of insisting they couldn't have been authentic. The evidence overwhelmingly indicates, however, that the pillars are historically correct: it is the actors who are not authentic. At The Maid's Tragedy, we saw a huge mess of scenery, largely hidden behind the column; three quarters of the back facade covered with a very baggy black cloth; and, in the middle of the groundlings' space, a throne on a dais. Richard Proudfoot, praising this set, observed that it is a perfect reconstruction of a court-masque set. So it is, and that is exactly what's wrong with it: it is the set for a production in the Whitehall Banqueting House, requiring a proscenium stage and an audience located in front. Such a set has nothing whatever to do with an open, three-sided stage such as the Globe's. For us and about half the audience, all the action of the masque was hidden behind the pillars. What the people sitting in the center saw was quite stylish, though even here the black cloth still looked perfunctory and makeshift, a clear index to how badly this production wanted to be somewhere else. In fact The Maid's Tragedy did nothing whatever to take the special qualities of the theater into account. Most of the action was played halfway back, as it would have been on a proscenium stage, rendering it invisible to much of the audience. The performers of A Chaste Maid in Cheapside, on the contrary, did their best to work with the house and even had quite a lot of fun with it. All entrances were made around the outside of the pillars; most of the action was played as far downstage as possible; and there was a good deal of use made of the pillars and of the architecture of the Globe generally-leaning on the columns, climbing up to the roof, emphatically not ignoring the building. For this theater A Chaste Maid was a much better show. But in both productions acoustics

Third-Degree Price Discrimination under Economies of Scale

There has long been a controversy in economics about whether or not a firm with monopoly power should be allowed to exploit its monopoly power by engaging in third-degree price discrimination.' The effect of third-degree price discrimination on welfare is two-fold: (1) output under price discrimination is misallocated because different groups are charged different prices but (2) if total output is different under price discrimination than under uniform pricing, this will also affect welfare.2 Schmalensee [8], Varian [11; 12] and Schwartz [9] have shown that price discrimination must decrease welfare if output under price discrimination is the same or less than output under uniform pricing. This fundamental result is quite robust and holds regardless of the number of sub-markets or the behavior of marginal cost (rising, constant or falling); it also holds even if the sub-market demands are interdependent. A necessary, but not sufficient, condition for price discrimination to be beneficial is that it increase total output. Perhaps the most common situation in which price discrimination will be beneficial is the case where only one sub-market is served under uniform pricing but two or more sub-markets are served under price discrimination. In this case Hausman and Mackie-Mason [3] have pointed out that price discrimination will result in a Pareto welfare improvement if marginal cost is constant or falling. Even when price discrimination does not open up new markets. Hausman and Mackie-Mason [3] and Nahata, Ostaszewski, and Sahoo [5] have shown that price discrimination can result in a Pareto improvement by lowering prices in all sub-markets. Hausman and Mackie-Mason [3, 257] argue that price discrimination is most likely to be beneficial when economies of scale are present:3

Cost of gentamicin assays carried out by microbiology laboratories.

To assess the current range of prices charged for gentamicin assays in United Kingdom laboratories; and to examine the laboratories' likely response to increases or decreases in the demand for the service. A postal survey of the 420 members of the Association of Medical Microbiologists was used to establish the range of prices charged for aminoglycoside assays. Additionally, eight private institutions were contacted to determine what the private sector was charging for aminoglycoside assays. Reagent costs in the NHS laboratories were calculated by dividing the total cost of all aminoglycoside assay kits by the number of samples analysed. The NHS and the private institutions both showed a wide price variation. Prices charged to an in-hospital requester for a peak and trough assay ranged from 5.00 pounds to 68.20 pounds (n = 44), and to an external private hospital, under a bulk service contract, from 5.00 pounds to 96.00 pounds (n = 47). Prices charged by private laboratories ranged from 49.00 pounds to 84.00 pounds (n = 8). There was a log linear correlation in the NHS laboratories between the reagent costs per assay and the number of assays performed per year, and most laboratories thought that their price per assay would be sensitive to increases or decreases in demand. Laboratories which had purchased their assay machines had lower reagent costs per assay but higher repair and maintenance costs. Overall, number of assays performed and method of payment for assay machinery only accounted for 44.8% of the observed variation in assay kit costs. The price range for gentamicin assays in the United Kingdom is wide and is only partially explained by the number of assays performed. Most laboratories believe that they would experience a reduction in unit cost as output increases. The currently offered range of prices is, in part, due to variation in the laboratories' approach to costing the service provided and some laboratories charge prices which do not even cover the cost of assay kits. Overall, we believe that prices charged should be as close as possible to the marginal cost of the tests performed.

OPTIMAL SPATIAL TARIFFS OF JOINT PRODUCTS: THE PLANNING OF A COGENERATION AND DISTRICT‐HEATING PROJECT

ABSTRACT It is assumed here that utility districts supplying both electricity and heating, given their institutional and physical environments, can be considered in terms of continuous, spatially‐differentiated markets in which different consumers can be charged different prices for each of the joint products. An optimal spatial pricing rule is derived from a given spatial distribution of demand and income, a given normative function of distributional equity, and an assumption of spatially interdependent supply costs. In addition, the optimal size of the central cogenerating plant and the optimal size of the district are simultaneously derived. Finally, in the feasibility analysis, the possibility of cross‐subsidization is introduced.

Priorities and policies—private sector involvement in our fields of interest

Members of LISC, and the professional communities which are served by the Council, can probably agree on some com mon objectives—excellence in our public and private sector library and information services; more points of access to LIS1 resources; greater capital investment in information products and services; a spread of LIS firms, which can build up worthwhile earnings in export markets; and more and better jobs for librarians, archivists and information scientists. But there is a sharp divergence of opinion on ways of reaching these ends. Where should the boundaries lie between private enter prise and public service? Should there be a shift in the demar cation lines? One side emphasizes the economic opportunities, the other, the social imperatives; and there is a broadening debate about pricing of services and charging of fees. This paper reviews the two sides of the case, and the financial realities behind current developments and trends. Finally, it calls for LISC to make a thorough study of how common objectives can best be achieved, focusing on radically new approaches in which private enterprises would be closely en gaged.

CREDIT CARDS AND THE TWO‐TIER PRICING CONTROVERSY: A COMMENTARY

This study evaluates the cost and benefits of credit cards as they relate to the two-tier pricing controversy concerning the use of credit cards. A two tier pricing system is one in which merchandise has two prices -- one for cash and one for credit. Under a two-tier pricing system, a cash customer may be charged lower prices than credit card customers. Without such a system it is sometimes argued that cash customers could be subsidizing the cost of credit card plans. In theory, the point of two-tier pricing systems is to permit a reallocation of costs in which the merchant can offer a price differential to cash customers to reflect the alleged savings realized by not having to pay the card issuer a percentage of the sales price to service the transaction.The two-tier pricing controversy involves several major issues. Of paramount concern is the validity of the underlying premise of two-tier pricing, namely, that cash customers are subsidizing credit card customers and should be charged a lower rate. If so, another issue involves whether a price differential should be offered In the form of a discount for cash customers or a surcharge for credit card customers. Finally, the issue concerning federal preemption of state usury laws is a matter of controversy. At the present time these three issues have been tentatively resolved with the passage by Congress on February 6, 1976 of S.2672 (Public Law 94-222). This legislation provides permission for merchants to grant discounts of up to 5% for the payment of cash but prohibits imposition of surcharges on credit card sales under the Fair Credit Billing Act. Cash discounts above 5% are permitted but the merchant would have to comply with truth-in-lending and state usury laws, which effectively precludes discounts exceeding 5%. This legislation will expire three years from date of enactment.This study contends that considerable research is needed to resolve these issues before final legislation is promulgated. As a preliminary step in this direction, a review, analysis, and synthesis was made of much of the literature concerning credit cards and their relationship to the two-tier pricing controversy. Cost data were also generated to provide a partial empirical basis for the analysis.To begin to develop a sound and equitable solution to the two-tier pricing controversy, including the cost benefit characteristics of credit cards and their alternative means of payment and credit, empirical answers to several questions must be found. At the present time much of what is known is based on advocacy hearsay, opinion, simplified and/or abstract theory, and rules of thumb. Among the questions that need answers before a rational decision can be made concerning two-tier pricing are the following:1.How would the real world competitive nature of trading area retail markets affect the so-called economic equivalency of discounts and surcharges?2. Is the impact of discounts on consumer behavior the same as that of surcharges?3. Would two-tier pricing discriminate against segments of the credit card using public?4. Is it equitable to impose two-tier pricing as a means of isolating credit card costs without also legislating separate pricing for each identifiable service offered by merchants?5.What would be the impact of discounts and surcharges on the level of economic activity?6. What are the costs (net) and benefits to the affected parties of alternative payment mechanisms (e.g., cash, checks, charge accounts, credit cards) and how can these factors be isolated, measured, collected, and compared?7. What are the costs (net) and benefits to the affected parties of alternative sources of credit (e.g., check credit and overdraft plans, installment credit, charge accounts, credit cards) and how can these factors be isolated, measured, collected, and compared?The last two questions are directly related to the purpose of this study. The others are outside the scope of this study.Based on the analysis and synthesis of the relevant information to the purpose of this study, the following tentative conclusions were reached:1. No “final” legislation concerned with two-tier pricing should be enacted until this important issue can be resolved on the basis of rational, objective, and empirical research. This research should include the economic, psychological, and equity aspects of two-tier pricing as related to card issuers, banks, merchants, consumers, and the economy.2.Those who favor two-tier pricing are implicitly assuming a partial unbundling of the costs of alternative payment mechanisms and sources of credit without sufficient evidence concerning their relative size and the benefits of these alternatives to the various affected parties.3. From the standpoint of the consumer, merchant and bank, the costs and benefits of credit cards combine to offer both a desirable market proven alternative method of payment and source of credit. These advantages are too important to the affected parties to be risked by legislation not based on valid empirical research.

Unfair Price Discrimination in P-L Insurance and the Reliance on Loss Ratios

The elimination of price discrimination is accepted as being a major goal of the public regulation of property and liability insurance. This paper argues that the recent trend in the industry towards more open competition and consequently towards more price differentiation among insureds increases actual price discrimination instead of reducing it as cost minimizing insurance companies will tend to differentiate among their insureds according to their loss ratios. One of the major results of such a policy is that inner-city residents have to pay more for their auto insurance, due to the fact that they live in more congested areas. Actually, the congestion is generated by suburban cars coming into the city. The higher insurance rates of the inner-city residents thus reflect the costs of the driving habits of the suburban residents. Eliminating this inequality will require the regulating agencies to intervene more in the market to readjust the insurance rates in a way which is more compatible with economic justice. All states require under their rate regulatory laws that property and liability rates be not unfairly discriminatory. Although some business leaders and some insurance scholars have questioned the logic of this requirement, elimination of discriminatory ratings has remained a major goal of public policy toward insurance.' Many suggest that elimination of discriminatory, inadequate and excessive ratings is fundamental to the goal of public policy toward P-L insurance rating today in most of the states.2 However, in spite of this focus upon price discrimination, and the central role that its elimination has among the goals of public regulation of insurance, the correct meaning of price discrimination has been often misunderstood by the members of the insurance industry, by the public, and even by the regulators themselves. Contrary to beliefs of many, price discrimination does not cover all cases in which different consumers are charged different prices for basically Michael Etgar, Ph.D., is Assistant Professor of Operations Management in the School of Management of the State University of New York at Buffalo. This paper was submitted in September, 1974. 1 See C. Arthur Williams, Unfair Price Discrimination in Property and Liability in Kimball and Denenberg (ed), Insurance, Government and Social Policy (Homewood, Illinois: Richard D. Irwin, 1969). 2 See Herbert S. Denenberg, et al., Risk and Insurance (Englewood Cliffs, New Jersey: Prentice-Hall, 1969) Chapter 1.

Comparing drug costs in rheumatic diseases

When there is little to choose between different drugs available for the same purpose, as in the case of the anti-inflammatory analgesic drugs discussed in the preceding article, it is reasonable to make the choice on grounds of cost. It can however be difficult to construct a meaningful cost comparison for the drugs in a particular therapeutic group. One obvious problem is that of dosage, for it is not clear which dose in a wide range should be chosen for the comparison. Perhaps the most appropriate dosage is that most commonly used (the modal dosage) in long-term maintenance therapy. The modal dose could be derived from an analysis of prescriptions, or estimated approximately from clinical trial reports, or from a consensus view of clinicians with experience of the drug. But provided the dose used in a comparison is clearly stated the result should not mislead anyone, even if the dose is chosen arbitrarily. A second problem is the difference in drug costs in hospitals and in retail pharmacy. Hospital prices are generally not published, and vary between different hospitals, whereas retail pharmacy prices are published and uniform. Some manufacturers have deliberately charged hospitals low prices for a drug and retail pharmacists high prices, presumably to increase use of the drug in hospitals which are more cost-conscious, and which also influence prescribing by family doctors in their catchment area. As long as such multiple pricing continues it seems more practical to base comparisons on retail costs. Thirdly, should non-drug costs be included, such as the pharmacist’s fee, on-cost allowance, and container allowance; and should the sum collected as prescription charge be deducted? Since on the whole these items are constant, they do not affect the essentials of comparisons and they may just as well be omitted.