DOCSLIB.ORG

Jules Dupuit and the Early Theory of Marginal Cost Pricing Author(S): R

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Jules Dupuit and the Early Theory of Marginal Cost Pricing Author(S): R Jules Dupuit and the Early Theory of Marginal Cost Pricing Author(s): R. B. Ekelund, Jr. Source: Journal of Political Economy, Vol. 76, No. 3 (May - Jun., 1968), pp. 462-471 Published by: The University of Chicago Press Stable URL: http://www.jstor.org/stable/1829307 . Accessed: 05/05/2014 19:39 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. The University of Chicago Press is collaborating with JSTOR to digitize, preserve and extend access to Journal of Political Economy. http://www.jstor.org This content downloaded from 128.97.27.21 on Mon, 5 May 2014 19:39:54 PM All use subject to JSTOR Terms and Conditions Jules Dupuit and the Early Theory of Marginal Cost Pricing R. B. Ekelund,Jr.* Texas A and M University I. Introduction The name of JulesDupuit, the nineteenth-centuryFrench engineer, has been frequentlyinvoked in contemporaryeconomic literature concerned with marginalcost pricing(Hotelling, 1938, pp. 242-44; Nelson, 1964, pp. vii-viii) and cost-benefitanalysis (Prest and Turvey,1965, p. 683). Althoughhis contributionsin the area of utilitytheory (Stigler, 1950), consumers'surplus (Houghton, 1958), and price discrimination(Edge- worth,1912) were,by any standard,remarkable for the time,his role as proclaimedmentor of the moderntheory of marginalcost pricingand, more generally,of cost-benefittheory has been largelyunexplored and often misunderstood.The resulthas been a general confusionamong moderntheorists concerning his achievementin this area.1 Most writers have not botheredto investigateDupuit's originalworks and, following Hotelling'soriginal attribution, have simplyaccepted Dupuit as the first marginalcost theorist.Ragnar Frisch, Hotelling's firstcritic, may be placed in thiscamp (Frisch,1939, p. 145). Such neglecthas probablybeen nurturedby the relativeobscurity of his writingsand by the fact that, untilrecently, only two of his economicarticles have been translatedinto English(Dupuit, 1844, 1849b). The purposeof thisarticle is to assess the natureof Dupuit's contribu- tionto thewelfare theory of marginalcost pricing.It willbe concludedthat although Dupuit has rightfulclaims as the firstcost-benefit economist, * This paper has grownout of a largerstudy of the economictheory of Dupuit. I would like to acknowledgemy appreciation for a generousgrant from the L.S.U. Foundationwhich made thetranslation of Dupuit's workspossible. I would like to thankProfessor J. P. Payne,Jr., R. F. Hebert,and L. H. Falk, as wellas theeditors of thisJournal, for helpful comments on earlierdrafts of thispaper. Finally, a very specialthanks to ProfessorW. J.Stober, not only for useful suggestions, but for having furnishedthe proofof Dupuit's theorem.I am solelyresponsible for final content, however. I Hotelling,for example, who originally(1938, p. 242) ascribedthe originsof the argumentto Dupuit,later modified his position. 462 This content downloaded from 128.97.27.21 on Mon, 5 May 2014 19:39:54 PM All use subject to JSTOR Terms and Conditions JULES DUPUIT AND MARGINAL COST PRICING 463 he was not a progenitorof theprinciple. Discovery of a short-runmarginal cost principlein Dupuit's writings,in brief,would requirea contrivedand incorrectinterpretation of his remarkson costs and on the efficacyof subsidies.The issues are especiallytimely in view of the renascenceof interestin both the theoryand applicationof cost-benefitanalysis. II. The Principleof UtilitePerdue Dupuit was thefirst economist explicitly to statethe principleof marginal utility2and to associate the area underthe demand curvewith a welfare measureutilize absolue. Dupuit, as did Cournotearlier, believed quantity demandedto be a decreasingfunction of price and, as earlyas 1844, he developedthe conceptwhich Marshall later called "consumers'surplus." Dupuit called thissurplus "relative utility" or "utilityremaining to con- sumers."The demand curvewas used by Dupuit as a utilitymeasure to analyze the welfareeffects of tolls, tariffs,costs, or prices; and it is here that the welfareeconomics of Marshall findsits origins.3 Dupuit set out to assess the effectsof taxes and tolls,though not speci- ficallyrelating them to costs,on whathe called utiliteperdue, which is the differencebetween utilityproduced (producers' costs and consumers' surplus) at any quantityand the total area under the demand curve. Increasesin prices,taxes, and tolls would reduce outputand the "utility available to society" (consumers'and producers'surplus), but Dupuit was even moreprecise. He pointedout that"where a tax is smallrelative to thecost of manufacture. .. it is legitimateto suppose a uniformrate of decrease [in quantityconsumed]," and, further,that "it may thus be said that the loss of utilityis proportionalto the square of the tax" (Dupuit, 1844,p. 104).5(See Fig. 1). 2 W. F. Lloyd (1833) discoveredby E. R. A. Seligman(1903, pp. 356-63)-is oftenattributed with the earliest exposition of the theoryof marginalutility, but no lessan authoritythan Alfred Marshall credited Dupuit with first "formally describing ... small incrementsof price as measuringcorresponding small incrementsof pleasure,"relegating to Lloyd the role of having "anticipated" utilityanalysis (Marshall,1920, p. 101). Lloyd's statement,according to Stigler,was adventitious (1950,pp. 312-13). 3 Marshall'smeasures, as contrastedto those of Dupuit, were protectedon all sides. Marshallassumed constancy of the marginalutility of money,to the con- sternationof contemporary theorists, so thatthe area underthe demand curve would representan unambiguouswelfare measure. 4 This utiliteperdue later became associated with reductionsin "net benefit," whichwas thesum of producers'and consumers'surplus. 5 Assumingthe marginalutility of moneyconstant, the area underthe demand curvein Figure I representsa moneymeasure of utility.Dupuit's theoremstates thatthe loss of utility,AUm, is proportionalto thesquare of thetax or price,Pm. In termsof Figure1, utiliteperdue may be written: AUm = ;AQmPm. (1) Now, by construction, Pm = mP1 and A Qm= mAQ, for a negatively sloped This content downloaded from 128.97.27.21 on Mon, 5 May 2014 19:39:54 PM All use subject to JSTOR Terms and Conditions 464 JOURNAL OF POLITICAL ECONOMY The rationalefor marginalcost pricingas a welfaretool clearlyfinds its roots in "Dupuit's theorem."Prices above marginalcosts resultin utiliteperdue, and, as Hotelling(1938, p. 245) was later to point out, per-unitor excise taxes, by raisingthe marginalcost curve,have similar effectson "net benefit."Dupuit himselfnoted the desirability of spreading taxes over largenumbers of commodities,but he did not linktolls, taxes, or priceswith marginal costs or with increasesin marginalcosts in the utiliteperdue argument. Here we simplyfind the generalproposition that tolls,taxes, and so forth,effected changes in welfare. P P 4 P 3 p2 0 Q Q Q Q A 4 3 2 1 FIG. 1 III. The Case of Bridges It is oftenthought that in his theoreticalcost-benefit studies of bridges Dupuit invoked the marginalcost dictum as a governmentalpricing guideline.Such conclusionsare not warranted,however, when one con- sidersDupuit's writings.In thisconnection, it is also necessaryto notethe ambiguityinvolved in referringto Dupuit's "bridge," since thereare no less than six bridge examples in his writings,some of them not even remotelysuggestive of a marginalcost argument(Dupuit, 1849b,p. 15). Several of the theoreticalbridges, however, do brushthe argument.An adaptationof a representativebridge (bridge "C") fromDupuit's article "On Tolls and TransportCharges" is presentedas Table 1 (1849b,p. 9). lineardemand function. Making use of theserelations, and multiplyingnumerator and denominator of (1) by P1, the result becomes AUUm= aP', where a = AQ1/2P1 is the constantfactor of proportionality.This resultholds for any lineardemand functionand approximatesthe loss of utilityfor small incrementsin price for a non-lineardemand function. This content downloaded from 128.97.27.21 on Mon, 5 May 2014 19:39:54 PM All use subject to JSTOR Terms and Conditions JULES DUPUIT AND MARGINAL COST PRICING 465 The demand curve(or "curve of consumption")for bridgepassage is givenin columns(1) and (2). Column (3) showsthe marginalreduction in bridgecrossings due to unittoll rateincreases. The totalutility lost at any toll rate (column4) is calculatedfor any giventoll as the sum of utility lost at thatrate [(1) x (3)] and the total utilitylost at the previousrate. Dupuit termedcolumn (5) "the yieldof the toll," and it simplyrepresents total revenueor receipts.Column (6), representingconsumers' surplus, was not includedby Dupuit, but it is calculated here for convenience. TABLE 1 A THEORETICAL TOLL BRIDGE Reduction of Utility Crossings Corre- Number Due Utility Con- spending Toll of to Rate Lost Yield sumers' to Toll Rate Crossings Increase by Toll of Toll Surplus (7) (1) (2) (3) (4) (5) (6) [(5) + (6)] 0 . 100 0 0 0 445 445 1 80 20 20 80 345 425 2 63 17 54 126 265 391 3 . 50 13 93 150 202 352 4 . 41 9 129 164 152 316 5 . 33 8 169 165* 111 276 6 . 26 7 211 156 78 234 7 . 20 6 253 140 52 192 8 . 14 6 301 112 32 144 9 . 9 5 346 81 18 99 10 . 6 3 376 60 9 69 11 . 3
Load more

Recommended publications
  • Managerial Economics Unit 6: Oligopoly
    Managerial Economics Unit 6: Oligopoly Rudolf Winter-Ebmer Johannes Kepler University Linz Summer Term 2019 Managerial Economics: Unit 6 - Oligopoly1 / 45 OBJECTIVES Explain how managers of firms that operate in an oligopoly market can use strategic decision-making to maintain relatively high profits Understand how the reactions of market rivals influence the effectiveness of decisions in an oligopoly market Managerial Economics: Unit 6 - Oligopoly2 / 45 Oligopoly A market with a small number of firms (usually big) Oligopolists \know" each other Characterized by interdependence and the need for managers to explicitly consider the reactions of rivals Protected by barriers to entry that result from government, economies of scale, or control of strategically important resources Managerial Economics: Unit 6 - Oligopoly3 / 45 Strategic interaction Actions of one firm will trigger re-actions of others Oligopolist must take these possible re-actions into account before deciding on an action Therefore, no single, unified model of oligopoly exists I Cartel I Price leadership I Bertrand competition I Cournot competition Managerial Economics: Unit 6 - Oligopoly4 / 45 COOPERATIVE BEHAVIOR: Cartel Cartel: A collusive arrangement made openly and formally I Cartels, and collusion in general, are illegal in the US and EU. I Cartels maximize profit by restricting the output of member firms to a level that the marginal cost of production of every firm in the cartel is equal to the market's marginal revenue and then charging the market-clearing price. F Behave like a monopoly I The need to allocate output among member firms results in an incentive for the firms to cheat by overproducing and thereby increase profit.
    [Show full text]
  • Total Cost and Profit
    4/22/2016 Total Cost and Profit Gina Rablau Gina Rablau - Total Cost and Profit A Mini Project for Module 1 Project Description This project demonstrates the following concepts in integral calculus: Indefinite integrals. Project Description Use integration to find total cost functions from information involving marginal cost (that is, the rate of change of cost) for a commodity. Use integration to derive profit functions from the marginal revenue functions. Optimize profit, given information regarding marginal cost and marginal revenue functions. The marginal cost for a commodity is MC = C′(x), where C(x) is the total cost function. Thus if we have the marginal cost function, we can integrate to find the total cost. That is, C(x) = Ȅ ͇̽ ͬ͘ . The marginal revenue for a commodity is MR = R′(x), where R(x) is the total revenue function. If, for example, the marginal cost is MC = 1.01(x + 190) 0.01 and MR = ( /1 2x +1)+ 2 , where x is the number of thousands of units and both revenue and cost are in thousands of dollars. Suppose further that fixed costs are $100,236 and that production is limited to at most 180 thousand units. C(x) = ∫ MC dx = ∫1.01(x + 190) 0.01 dx = (x + 190 ) 01.1 + K 1 Gina Rablau Now, we know that the total revenue is 0 if no items are produced, but the total cost may not be 0 if nothing is produced. The fixed costs accrue whether goods are produced or not. Thus the value for the constant of integration depends on the fixed costs FC of production.
    [Show full text]
  • Externalities and Public Goods Introduction 17
    17 Externalities and Public Goods Introduction 17 Chapter Outline 17.1 Externalities 17.2 Correcting Externalities 17.3 The Coase Theorem: Free Markets Addressing Externalities on Their Own 17.4 Public Goods 17.5 Conclusion Introduction 17 Pollution is a major fact of life around the world. • The United States has areas (notably urban) struggling with air quality; the health costs are estimated at more than $100 billion per year. • Much pollution is due to coal-fired power plants operating both domestically and abroad. Other forms of pollution are also common. • The noise of your neighbor’s party • The person smoking next to you • The mess in someone’s lawn Introduction 17 These outcomes are evidence of a market failure. • Markets are efficient when all transactions that positively benefit society take place. • An efficient market takes all costs and benefits, both private and social, into account. • Similarly, the smoker in the park is concerned only with his enjoyment, not the costs imposed on other people in the park. • An efficient market takes these additional costs into account. Asymmetric information is a source of market failure that we considered in the last chapter. Here, we discuss two further sources. 1. Externalities 2. Public goods Externalities 17.1 Externalities: A cost or benefit that affects a party not directly involved in a transaction. • Negative externality: A cost imposed on a party not directly involved in a transaction ‒ Example: Air pollution from coal-fired power plants • Positive externality: A benefit conferred on a party not directly involved in a transaction ‒ Example: A beekeeper’s bees not only produce honey but can help neighboring farmers by pollinating crops.
    [Show full text]
  • Consumers' Surplus 1506 26
    Consumers’ surplus when individuals lack integrated preferences: a development of some ideas from Dupuit Robert Sugden School of Economics, University of East Anglia Norwich NR4 7TJ, United Kingdom [email protected] 25 June 2015 Abstract: In modern economics, consumers’ surplus is understood as the sum of individuals’ compensating variations, defined by reference to well-behaved preferences. If individuals lack integrated preferences, as behavioural economics suggests they often do, consumers’ surplus cannot be defined. However, Dupuit – the earliest theorist of consumers’ surplus – did not assume integrated preferences. His concept of consumers’ surplus can be interpreted in terms of the maximum yield of discriminatory prices. In principle, this can be measured without making assumptions about preferences, but (contrary to what Dupuit apparently thought) is not in general equal to the area under the observed demand curve. Keywords : consumers’ surplus, price discrimination, integrated preferences, Dupuit Acknowledgements : This paper was presented at the conference of the European Society for History of Economic Thought, Lausanne, May 2014. I thank participants at this conference and three anonymous referees for their comments. My work was supported by the Economic and Social Research Council through the Network for Integrated Behavioural Science (grant reference ES/K002201/1). 1 ‘Hence the saying which we shall often repeat because it is often forgotten: the only real utility is that which people are willing to pay for’ (Jules Dupuit, 1844/ 1952, p. 262). Consumers’ surplus is one of the most important theoretical constructs in applied welfare economics. It plays an essential part in normative economic analyses of competition policy, of price regulation for natural monopolies, and of public provision of non-marketed goods such as road space, flood protection and free health care.
    [Show full text]
  • The Law and Economics of Price Discrimination in Modern Economies: Time for Reconciliation?
    Scholarship Repository University of Minnesota Law School Articles Faculty Scholarship 2010 The Law and Economics of Price Discrimination in Modern Economies: Time for Reconciliation? Daniel J. Gifford University of Minnesota Law School, [email protected] Robert T. Kudrle University of Minnesota Hubert Humphrey Institute of Public Affairs, [email protected] Follow this and additional works at: https://scholarship.law.umn.edu/faculty_articles Part of the Law Commons Recommended Citation Daniel J. Gifford and Robert T. Kudrle, The Law and Economics of Price Discrimination in Modern Economies: Time for Reconciliation?, 43 U.C. DAVIS L. REV. 1235 (2010), available at https://scholarship.law.umn.edu/faculty_articles/358. This Article is brought to you for free and open access by the University of Minnesota Law School. It has been accepted for inclusion in the Faculty Scholarship collection by an authorized administrator of the Scholarship Repository. For more information, please contact [email protected]. The Law and Economics of Price Discrimination in Modern Economies: Time for Reconciliation? Daniel J. Gifford* Robert T. Kudrle** TABLE OF CONTENTS INTRODUCTION: LAWS TARGETING PRICE DISCRIMINATION .............. 1237 1. ECONOMIC CONCEPTIONS OF PRICE DISCRIMINATION: A BRIEF R EVIEW ..................................................................... 1239 A. Price Discrimination,Defined .......................................... 1239 B. Arbitrage,Market Power, and PriceDiscrimination ........ 1243 C. Price DiscriminationInvolving the Rates
    [Show full text]
  • Friedrich A. Von Hayek Papers, Date (Inclusive): 1906-2005 Collection Number: 86002 Creator: Hayek, Friedrich A
    http://oac.cdlib.org/findaid/ark:/13030/kt3v19n8zw No online items Register of the Friedrich A. von Hayek Papers Processed by Linda Bernard and David Jacobs Hoover Institution Archives Stanford University Stanford, California 94305-6010 Phone: (650) 723-3563 Fax: (650) 725-3445 Email: [email protected] © 1998, 2003, 2011 Hoover Institution Archives. All rights reserved. Register of the Friedrich A. von 86002 1 Hayek Papers Register of the Friedrich A. von Hayek Papers Hoover Institution Archives Stanford University Stanford, California Contact Information Hoover Institution Archives Stanford University Stanford, California 94305-6010 Phone: (650) 723-3563 Fax: (650) 725-3445 Email: [email protected] Processed by: Linda Bernard and David Jacobs Date Completed: 1998, 2000, 2011 Encoded by: James Lake, ByteManagers using OAC finding aid conversion service specifications, and Elizabeth Phillips © 2011 Hoover Institution Archives. All rights reserved. Descriptive Summary Title: Friedrich A. von Hayek papers, Date (inclusive): 1906-2005 Collection number: 86002 Creator: Hayek, Friedrich A. von (Friedrich August), 1899-1992. Extent: 139 manuscript boxes, 8 oversize boxes, 23 card file boxes, 5 envelopes, 2 audio tapes, 16 videotape cassettes, digital files(66 linear feet) Repository: Hoover Institution Archives Stanford, California 94305-6010 Abstract: Diaries, correspondence, speeches and writings, notes, conference papers, conference programs, printed matter, sound recordings, and photographs, relating to laissez-faire economics and associated concepts of liberty, and especially to activities of the Mont Pèlerin Society. Most of collection also available on microfilm (91 reels). Sound use copies of sound recordings available. Physical Location: Hoover Institution Archives Language: English and German. Access Collection is open for research.
    [Show full text]
  • Economic Evaluation Glossary of Terms
    Economic Evaluation Glossary of Terms A Attributable fraction: indirect health expenditures associated with a given diagnosis through other diseases or conditions (Prevented fraction: indicates the proportion of an outcome averted by the presence of an exposure that decreases the likelihood of the outcome; indicates the number or proportion of an outcome prevented by the “exposure”) Average cost: total resource cost, including all support and overhead costs, divided by the total units of output B Benefit-cost analysis (BCA): (or cost-benefit analysis) a type of economic analysis in which all costs and benefits are converted into monetary (dollar) values and results are expressed as either the net present value or the dollars of benefits per dollars expended Benefit-cost ratio: a mathematical comparison of the benefits divided by the costs of a project or intervention. When the benefit-cost ratio is greater than 1, benefits exceed costs C Comorbidity: presence of one or more serious conditions in addition to the primary disease or disorder Cost analysis: the process of estimating the cost of prevention activities; also called cost identification, programmatic cost analysis, cost outcome analysis, cost minimization analysis, or cost consequence analysis Cost effectiveness analysis (CEA): an economic analysis in which all costs are related to a single, common effect. Results are usually stated as additional cost expended per additional health outcome achieved. Results can be categorized as average cost-effectiveness, marginal cost-effectiveness,
    [Show full text]
  • Space, Railways, and Market Structures1
    Space, Railways, and Market Structures1 In Memory of Héctor Grupe By Manuel Fernández López Institute of Economic Research (University of Buenos Aires), CONICET, and National Academy of Economic Sciences 1. Introduction The market demand for a good descends when its price increases. This is a plain fact, observable in the real world. However the same fact may mean different things for the seller, according to the number of other competitors operating in the market. When the number is high, and thus small the part of total production under control of an individual business, any seller may change its own supply without altering the market price. If he supplies more, this doesn't cause the market price to be diminished. Any individual supplier, at the market price, may throw on the market at the same price all the units supplied, whatever the quantity. Selling one unit more accrues to him an additional gross revenue (i.e. “marginal revenue”) equal to the price (or unit revenue). His profit is increased whenever the selling of one unit more causes a cost-increase which is less than the increase of gross revenue: that is, when marginal cost is less than the market price. On the contrary, when the share of the individual seller in the market supply is significant, an increase of his individual supply is perceived by the market as a greater supply, and thus the market price decreases. All the more when the seller is just one (a monopoly) for the whole market. In such a case, the market demand is also the monopolist's unit or average revenue.
    [Show full text]
  • Principles of Microeconomics
    PRINCIPLES OF MICROECONOMICS A. Competition The basic motivation to produce in a market economy is the expectation of income, which will generate profits. • The returns to the efforts of a business - the difference between its total revenues and its total costs - are profits. Thus, questions of revenues and costs are key in an analysis of the profit motive. • Other motivations include nonprofit incentives such as social status, the need to feel important, the desire for recognition, and the retaining of one's job. Economists' calculations of profits are different from those used by businesses in their accounting systems. Economic profit = total revenue - total economic cost • Total economic cost includes the value of all inputs used in production. • Normal profit is an economic cost since it occurs when economic profit is zero. It represents the opportunity cost of labor and capital contributed to the production process by the producer. • Accounting profits are computed only on the basis of explicit costs, including labor and capital. Since they do not take "normal profits" into consideration, they overstate true profits. Economic profits reward entrepreneurship. They are a payment to discovering new and better methods of production, taking above-average risks, and producing something that society desires. The ability of each firm to generate profits is limited by the structure of the industry in which the firm is engaged. The firms in a competitive market are price takers. • None has any market power - the ability to control the market price of the product it sells. • A firm's individual supply curve is a very small - and inconsequential - part of market supply.
    [Show full text]
  • Jules Dupuit and the Railroads: What Is the Role of the State? Philippe Poinsot
    View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Archive Ouverte en Sciences de l'Information et de la Communication Jules Dupuit and the railroads: what is the role of the State? Philippe Poinsot To cite this version: Philippe Poinsot. Jules Dupuit and the railroads: what is the role of the State?. Journal of the History of Economic Thought, Informa UK (Taylor & Francis), 2016, 38 (2), 10.1017/S1053837216000080. hal-01383443 HAL Id: hal-01383443 https://hal.archives-ouvertes.fr/hal-01383443 Submitted on 22 Aug 2019 HAL is a multi-disciplinary open access L’archive ouverte pluridisciplinaire HAL, est archive for the deposit and dissemination of sci- destinée au dépôt et à la diffusion de documents entific research documents, whether they are pub- scientifiques de niveau recherche, publiés ou non, lished or not. The documents may come from émanant des établissements d’enseignement et de teaching and research institutions in France or recherche français ou étrangers, des laboratoires abroad, or from public or private research centers. publics ou privés. JULES DUPUIT AND THE RAILROADS: WHAT IS THE ROLE OF THE STATE? ABSTRACT The emergence of railroads in France in the nineteenth century gave rise to new debates on analytical issues. The focus of interest lay in the fact that they are natural monopolies. In this paper, I focus on Jules Dupuit’s work on the operations of the railroad sector. Curiously, he seemed to have defended two contrasting positions, opening the way for debate among com- mentators: on the one hand, he claimed that unlimited competition is the most efficient way to operate in the railroad sector; on the other, he stated that State management was the best way to run the railroads.
    [Show full text]
  • The Economics of E-Commerce and Technology
    The Economics of E-commerce and Technology Monetization: Prices and Advertising 1 10/13/2016 The Stages of Buying (The Marketing Funnel) Marketing Other Networks • Content • Broadcast of premium Funnel content on multiple • SEO, SEM, display, platforms Awareness email and word-of- mouth • Synchronized marketing campaigns Company X leverages its • Frequency of • Mass media Lower Familiarity user visits (pull) Broadcast relationships frequency (push) with content providers to • Rise of third-party reviews • Participation in target a community features • Comments / message high-value Opinion boards • Brand affiliation user • Content / brand Consideration affinity Consumer Value of Value Company X network is • Typically lose the user • Company X can comprised of and data at this juncture capitalize on and high-value Intent as users exit the network influence intent users with expressed • Company X can intent Shopping facilitate process Higher Purchase 2 10/13/2016 Basic Monopoly Pricing 3 10/13/2016 Monopoly Pricing: Recap Constant marginal cost, c. Firm chooses quantity to maximize profits (q) q(p(q) c) First-order condition MR(q) c Inverse elasticity rule p c 1 p dq where e p e q dp 4 10/13/2016 Multi-product monopolist Microsoft sells XBox and Halo If sell separately optimal prices pX=300, pH=50. But they sell both: how should they price them? Walmart sells Xbox and PS3 If sell separately optimal prices pX=300, pPS=400. But they sell both: how should they price? Economist sells print and online editions How should they price? 5 10/13/2016 Multi-product monopolist Firm chooses (q1,q2) to maximize (q1,q2 ) q1( p1(q1,q2 ) c1) q2 ( p2 (q1,q2 ) c2 ) Inverse elasticity rule for p1 p c 1 ( p c )q p dq 1 1 2 2 2 e where e 1 2 12 12 p1 e11 p1q1e11 q2 dp1 Substitutes: e12<0 Negative externality so increase p1.
    [Show full text]
  • PRINCIPLES of MICROECONOMICS 2E
    PRINCIPLES OF MICROECONOMICS 2e Chapter 8 Perfect Competition PowerPoint Image Slideshow Competition in Farming Depending upon the competition and prices offered, a wheat farmer may choose to grow a different crop. (Credit: modification of work by Daniel X. O'Neil/Flickr Creative Commons) 8.1 Perfect Competition and Why It Matters ● Market structure - the conditions in an industry, such as number of sellers, how easy or difficult it is for a new firm to enter, and the type of products that are sold. ● Perfect competition - each firm faces many competitors that sell identical products. • 4 criteria: • many firms produce identical products, • many buyers and many sellers are available, • sellers and buyers have all relevant information to make rational decisions, • firms can enter and leave the market without any restrictions. ● Price taker - a firm in a perfectly competitive market that must take the prevailing market price as given. 8.2 How Perfectly Competitive Firms Make Output Decisions ● A perfectly competitive firm has only one major decision to make - what quantity to produce? ● A perfectly competitive firm must accept the price for its output as determined by the product’s market demand and supply. ● The maximum profit will occur at the quantity where the difference between total revenue and total cost is largest. Total Cost and Total Revenue at a Raspberry Farm ● Total revenue for a perfectly competitive firm is a straight line sloping up; the slope is equal to the price of the good. ● Total cost also slopes up, but with some curvature. ● At higher levels of output, total cost begins to slope upward more steeply because of diminishing marginal returns.
    [Show full text]