1. Pricing of Goods and Services
Managerial Economics
Pricing of Goods and Services

2. Overview . Pricing of Multiple Products
Products with interdependent cost pricing
Joint Products
Fully Distributed vs. Incremental Cost Pricing
Ramsey Pricing
Intermediate Products (Transfer Pricing)

3. What is pricing of multiple products
Most of the firms are engaged in the production of two or more products simultaneously
A multiproduct firm faces separate demand functions for individual product
Cost of production of two goods is totally mixed up

4. Pricing of Multiple Products
Products with interdependent Demands
Example: Procter and gamble has different brands some are interdependent others not
Pantene and Head & shoulders are interdependent
In Unilever, Dove and Lipton are not.

5. Products with interdependent Demands
For a two-product (A and B) firm, the marginal revenue functions of the firm are:
First Part indicates that change in revenue for A is due to one unit increase in sale of A
The second part indicates reflects demand interdependency which means that change in revenue of B due to one unit increase in sale of A
e.g. automobiles with car lock, stereo system

6. The process of producing beef and hides in a slaughterhouse
Joint Products
When a firm produced goods in fixed proportions they should be thought of as a product package because there is no way to produce one part of this package without also producing the other part.
Example
The process of producing beef and hides in a slaughterhouse

7. Joint products
MR = MC
MR = MR + MR
TOTAL
TOTAL A B
TOTAL

8. Joint Products in Fixed Proportions
Excess Production of A
same production of both A and B

9. Calculate the profit-Maximizing prices for joint products
MC = Q
BEEF
P = 80 – 2Q
MR = 60 – 2Q
HIDES
P = 60 – 1Q
MR = 80 – 4Q

10. Common Cost
Expense a firm incurs as a whole, and which cannot be assigned directly to any particular department, product, or segment of the business

11. Fully Distributed Costs
Fully Distributed cost refers to distribution of common cost to all the units produce
All common costs are distributed among the products and services of the firm. Then the price of each is set so that it covers the designated portion of common costs.

12. Example
Pakistan Railways have adopted fully distributed costing approach in costing of its services. Such costs include working expenses, interest and depreciation on capital and overheads. It is used for calculating the unit costs of transport services

13. Incremental Cost
Incremental cost is the cost associated with increasing production by one unit. Because some costs are fixed and other variable, the incremental cost will not be the same as the overall average cost per unit

14. Ramsey Pricing
If prices are to be increased, it is a good strategy to increase the markup on goods with the most inelastic demand, because consumers or users will buy them anyway.

15. Ramsey Pricing Elastic demand In- Elastic demand MCy Dy Qy Qy’ MCx DxPy
Elastic demand
MCy Py Dy Qy
Qy’ Px
MCx
In- Elastic demand Px Dx
Qx’ Qx

16. Transfer Pricing Pricing:
- a firm with multiple divisions where each is treated as an autonomous profit centre.
Transfer the product at Market Price
- where external market exists, transfer at
P=MC
- where external market is imperfect, behave like a discriminating monopolist
MR = MC

17. Transfer Pricing External Market:
Market is perfectly competitive ( can buy or sell as much as they want at market determined price)
Enough alternate available in case if demand or price changes
Possibility a firm demand cannot be met because the market may not produce exactly

18. No External market MC AC P Q

19. Pricing Intermediate goods with No External Market
MCw= MCp+MCt
MCp Pw
MCt Dw Pp
MRw Qw