...Marginal Cost Based Pricing in Transport Key Implementation Issues from the Economic Perspective Erik Verhoef, Free University Amsterdam Paper prepared for IMPRINT 1. Introduction Marginal cost pricing in transport is a ‘hot’ topic, in at least two senses. First, as is well known, over the last decade(s), sophisticated pricing policies in transport have evolved from a primarily academic, theoretical construct, to a realistic and seriously considered option for many areas – urban and non-urban – around the world. This is due to (at least) two simultaneous, interacting developments, viz. the steady growth in transport related problems such as congestion and emissions on the one hand, and the development of technologies enabling automated charging on the other. So, marginal cost pricing in transport is ‘hot’ in the sense that many governments, at different spatial levels, seriously explore the possibilities for implementing some form of pricing policies aimed at the containment of transport-induced externalities. At the same time, such proposals are rarely met by great public enthusiasm, making it a ‘hot’ topic from the political viewpoint in that policy makers might easily burn their hands when proposing to drastic pricing reforms in transport. A very common result is that proposals for pricing schemes often end up in the proverbial wastebasket long before a first penny was to be actually charged. Apparently, the implementation of marginal cost based pricing in transport is...
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...other means. In either case, the sales are intended to be on an incremental basis; they are not intended to be a long-term pricing strategy, since prices set this low cannot be expected to offset the fixed costs of a business. The variable cost of a product is usually only the direct materials required to build it. Direct labor is rarely completely variable, since a minimum number of people are required to crew a production line, irrespective of the number of units produced. The Marginal Cost Calculation ABC International has designed a product that contains $5.00 of variable expenses and $3.50 of allocated overhead expenses. ABC has sold all possible units at its normal price point of $10.00, and still has residual production capacity available. A customer offers to buy 6,000 units at the company's best price. To obtain the sale, the sales manager sets the price of $6.00, which will generate an incremental profit of $1.00 on each unit sold, or $6,000 in total. The sales manager ignores the allocated overhead of $3.50 per unit, since it is not a variable cost. Advantages of Marginal Cost Pricing The following are advantages to using the marginal cost pricing method: * Adds profits. There will be customers who are extremely sensitive to prices. This group might not otherwise buy from a company unless it were willing to engage in marginal cost pricing. If so, a company can earn some incremental...
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...ECO/561 Date Professor Selected good: Vegetable and fruit mix based ice cream for Unilever’s “Heartbrand” Introduction Frozen dessert, particularly ice cream, is one of the most prominent sectors of production due to its wide market scope and popularity. However, it is threatened by the increasing concern for healthy diets due to its fat, calorie, and sugar content. As a result, the demand for a healthier version of ice cream with retained or even improved sensory properties arises. Unilever responds to this demand by launching a new kind of ice cream which is based on vegetable and fruit mix, therefore improving the nutrient content. Economical analysis of the product, including market structure, associated costs, elasticity of demand, and pricing and non pricing strategies is provided below. Market Structure In order to identify the suitable strategies for the product launch, it is essential to identify the type of market structure in which the product will engage in. The product is a differentiated version of conventional ice cream, but is an imperfect substitute. In essence, the product is expected to compete in the market by means of value added attributes. Furthermore, there is relatively large number of sellers which could enter and exit the industry easily based on the market conditions. From the mentioned characteristics, it could be inferred that the type of market structure for the product is a monopolistic competition (McConnell, et al., 2009). Target Market ...
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...Differential Pricing: Many important industries involve technologies that exhibit increasing returns to scale, large fixed and sunk costs, and significant economies of scope. Two important examples of such industries are telecommunications services and information services. In each of these cases the relevant technologies involve high fixed costs, significant joint costs and low, or even zero, marginal costs. Setting prices equal to marginal cost will generally not recoup sufficient revenue to cover the fixed costs and the standard economic recommendation of "price at marginal cost" is not economically viable. Some other mechanism for achieving efficient allocation of resources must be found. The outcome of this investigation is that (i) efficient pricing in such environments will typically involve prices that differ across consumers and type of service; (ii) producers will want to engage in product and service differentiation in order for this differential pricing to be feasible; and, (iii)differential pricing will arise naturally as a result of profit seeking by firms. It follows that differential pricing can generally be expected to contribute to economic efficiency Thus differential pricing is “the practice of selling the same product to different customers at different prices even though the cost of sale is the same to each of them. More precisely, it is selling at a price or prices such that the ratio of price to marginal costs is different in different sales” ...
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...allows users to not only make calls but to move seamlessly from listening to music, to browsing the web, checking emails and back at the touch of a finger The company presented its product based on four pillars. It offered a small amount of products, focused on the high end, give priority to profit over market share and created a halo effect that makes people starve for new Apple products (Nielson, 2014). Apple surprised consumers with the release of the iPhone and today it continues to dominate by continuously reinventing its product. In this paper I will present a business proposal for the iPhone that addresses market structure, price elasticity, marginal cost and marginal revenue, suggested non-pricing strategies, barrier to entry and fixed and variable cost. Additionally, I will recommend an appropriate pricing and non-pricing strategies for the iPhone based on the projected economy's stage in the business cycle and the prevailing projected economic conditions for one or more macroeconomic factors. Market Structure According to InvestorWords, market structure is defined as the collection of factors that determine how buyers and sellers interact in a market, how prices change, and how different levels of the production and selling processes interact. The four basic market structures are Pure Competition, Monopoly, Monopolistic Competition and Oligopoly. The market structure that the Apple iPhone belongs to is Oligopoly. This is because a small number of firms control...
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...www.cambridge.org/micro4mbas McKENZIE: MICROECONOMICS FOR MBAS PPC CMYBLK ................................................................................................................ 10 Monopoly power and firm pricing decisions If monopoly persists, monopoly will always sit at the helm of government … its bigness is an unwholesome inflation created by privileges and exemptions which it ought not to enjoy. If there are men in this country big enough to own the government of the United States, they are going to own it. Woodrow Wilson That competition is a virtue, at least as far as enterprises are concerned, has been a basic article of faith in the American Tradition, and a vigorous antitrust policy has long been regarded as both beneficial and necessary, not only to extend competitive forces into new regions but also to preserve them where they may be flourishing at the moment. G. Warren Nutter and Henry Alder Einhorn t the bottom of almost all arguments against the free market is a deep-seated concern about the distorting (some would say corrupting) influence of monopolies. People who are suspicious of the free market fear that too many producers are unchecked by the forces of competition, but instead hold considerable monopoly power or control over market outcomes. Unless the government intervenes, these firms are likely to exploit their power for their own selfish benefit. This theme has been fundamental to the writings of economist John Kenneth Galbraith: The...
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...and the elasticity of demand for the product will be covered. Hypothetical data, based on similar real world products to estimate fixed and variable costs will be presented. According to Wang and Zheng (2012), the relationship between the market structure’s distinctions and production structure’s parameters can have a significant effect on an organization’s profit. Correctly identifying the market structure is an integral step in pricing and selling a product. The market structure for the unit described above is a purely competitive market structure. A purely competitive market structure’s characteristics include but are not limited to the following: perfectly elastic demand at the pre-determined price is dictated by market supply, members of this market structure are price takers, and any additional units sold above the constant product’s price will add profit to firm’s total revenue. Pricing will relate to the elasticity of the product due to the demand being dependent on price. According to Bolton (1989), price elasticities will differ amongst brands, product dimensions, and regions. Brand market share is a trend that helps to determine fluxuations in price elasticities. According to Shankar and Bolton (2004), relative brand price should be taken into consideration before pricing because it is one of the main pricing dimensions and factors consumers use for comparing products. For example, when Tivo...
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...the product. | |Assumptions regarding market structure and elasticity | |Yes they were defined with cost and price margins | | |Yes No | | |To what degree do you agree or |SD=Strongly Disagree |Justification |Comments | |disagree with the items below? |D=Disagree |included? | | | |N=Neutral | | | | |A=Agree | | | | |SA=Strongly Agree | | | |Chosen method to increase revenue | | |Gave good example for revenue increase based on his | | |SD D N A SA |Yes No |business plan. Need on how much it will cost. | |Chosen...
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...above are true for monopoly Answer: B 2. In a competitive industry with identical firms, long run equilibrium is characterized by A. P = AC B. P = MC C. MR = MC D. All of the statements associated with this question are correct Answer: D 3. Which of the following is true? A. A monopolist produces on the inelastic portion of its demand B. A monopolist always earns an economic profit C. The more inelastic the demand, the closer marginal revenue is to price D. In the short run a monopoly will shutdown if P < AVC Answer: D 4. Which of the following is true under monopoly? A. Profits are always positive B. P > minimum of ATC C. P = MR D. None of the statements associated with this question are correct Answer: B 5. In the long-run, monopolistically competitive firms: A. Charge prices equal to marginal cost B. Have excess capacity C. Produce at the minimum of average total cost D. Have excess capacity and produce at the minimum of average total cost Answer: B 6. If a monopolistically competitive firm's marginal cost increases, then in order to maximize profits the firm will A. Reduce output and increase price B. Increase output and decrease price C. Increase both output and price D. Reduce both output and price Answer: 7. Which of the following market structures would you expect to yield the greatest product variety? A. Monopoly B. Monopolistic Competition C. Bertrand Oligopoly D. Perfect Competition Answer: 8. The primary difference between...
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...airline industry appeared to be oligopolistic and would prevent new entrants. Some consensus did exist that the airline industry could perform competitively. This provides the rationale for the theory, which proposes that potential competition be substituted for the active participation of many sellers. For the theory to work, four conditions have to be met: no barrier to market entry, no economics of scale, consumers would be willing to switch quickly among carriers, and existing carriers had to be prevented from responding to new entrants' lower prices. 3. Define and discuss Cost of Service Pricing. ANS: Cost of service pricing takes a marginal-cost approach to pricing. Cost of service pricing can also be analyzed as a total cost or fully allocated cost approach to price setting, where the price charged by a carrier for a movement of a commodity represents the recovery of the related costs to make the movement. Here: Price = FC + VC + Profit. Price is determined by the allocation of...
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...Monopolistic competition firms can behave like monopolies including using market power to generate profit, but in the long run there competitors enter the market and the benefits of differentiation decrease with competition. Consumers benefit from the variety but production costs could be achieved if all the firms sold identical products (McConnell, Brue, and Flynn 2009). Keebler’s consumer’s demand of products is elastic, consumers can purchase similar products at a lower rate, but usually consumers prefer brand names. The goal of Keebler is to maximize total earnings (gross revenue - total operating cost). Given the state of the economy, Keebler could look to make a statement in the market by decreasing their prices to encourage consumers to buy while the economic conditions are less than ideal. Targeting certain demographics within the market will assist Keebler in finding the most appropriate strategy to deal with the current economic conditions in different areas. Marketing will play a significant role in years to come. Methods such as advertising on television, radio, Internet, newspapers, and magazines would be one form of marketing. Finally, attached chart represents variable cost, marginal cost,...
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...Final Business Proposal Final Business Proposal In 2009, Colgate-Palmolive Company introduced Colgate Wisp, a disposable and portable on-the-go toothbrush with built-in toothpaste that promises a just-brushed, clean feeling (Colgate-Palmolive Annual Report, 2009). The product performed well for a few months, but loses its grip in the market scene since then. There was a market plunge for Colgate Wisp and the revenue plummet. The goal of the firm is to boost its sales once more, and be able to acquire the market share in the industry thru innovation, lean production and workforce, and efficient utilization of appropriate resources. The purpose of this business proposal is to do an economic analysis of Colgate Wisp and provide valuable insights on economic trends that have a possible effect on the product performance. Market Structure and Product Elasticity The Colgate Wisp has the feature of a monopolistic competition market structure where a relatively large number of sellers produce differentiated products with widespread non-price competition and an easy entry to, and exit from, the industry (McConnell, Bruce, & Flynn, 2009). Product differentiation is notable in these particular market system wherein the company can create top quality disposable toothbrush, acquire an accessible location of stores that can sell the goods including the possibility of obtaining the market share using online trading, and state of the art packaging process. Hence, the Colgate Wisp...
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...Revised Business Proposal ECO/561 February 13, 2012 Revised Business Proposal Background Thomas Money Service Inc. began its operations in 1940 as a consumer finance company granting small loans for household needs. By 1945 TMS had expanded its services to include business loans, business acquisition financing, and commercial real estate loans. The following year, the company branched out into equipment financing through a subsidiary named Future Growth Inc. (FGI). The company’s decision was made at just the right time. The end of World War II brought about an increasing demand for construction and forestry equipment and paved the way for the company to purchase an equipment manufacturing company in 1951. The manufacturing company allowed FGI to build, sell, and finance their own brand of building and forestry equipment. At the same time, FGI made the decision to discontinue financing other brands of equipment. The company continuously increased profits year after year for 67 years. Even economic downturns did not slow them down and FGI continued operations without laying off a single worker. The value of the company’s stock grew to $85.60 from $5.00 and experienced six stock splits from 1975 to 1998. The present stock value is $35. A recent global downturn in the economy has affected the industry. Several forestry states including Oregon and Washington have encountered flooding, massive fires, and protests from animal activists. The effect of these disasters affected...
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...principle of efficient road user charging the user must be charged for all the additional costs, because they imposed by their used of the road system. Marginal external cost is an additional cost while marginal social cost are cost its borne directly by the user. This principle that all costs are valued at the compensation that needed to those willing to do. They have two main constraints in the development of road user charging the technical and economic. Charging has two form the Fuel duty and Vehicle excise duty. Efficient prices (MSC- MARGINAL SOCIAL COST CONCEPT). Have two concepts: SHORT RUN which pricing translates into, in terms of road pricing, is a need to measure three components of cost. The first is the cost imposed...
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...Business Proposal Jamie Curet ECO 561 December 19, 2011 Dr. Bob Larkin Everyday more people are starting to get rid of physical magazines, newspapers, and now even books. Many people love to read; however, very few have time to sit down and enjoy a good book. Will Bury is an enterprising inventor who truly believes in his newest invention. His mission is to provide people who already like to read the opportunity to read the same books digitally or to listen to them with a realistic synthetic voice. Will Bury is in need of a working location to continue the work of his latest product as well as a staff to carry on the implementation. He is currently working alone on his invention out of his garage. A working location with more staff will guarantee the company a selection of more books digitized as well as more sales and higher revenue. The company’s success is dependent on being able to get the product out for the customers as well as giving them as many different options of books possible. Identification of Market Structure: Will Bury’s business that he is trying to develop is a monopolistic competition market structure. Bury knows that there is already a market for books on CD; however, he has developed and patented a technology for text materials and creates a file with the option of reading it digitally or listening to it with that takes the printed word a realistic synthetic voice. Since he has developed this new technology and there are somewhat similar products...
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