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INTERNET EXERCISES
Chapter 13: Understanding Pricing
Exercise 1 – Pricing is a Very Powerful Marketing
Mix Tool
Exercise 2 – Pricing at the Local Level
Exercise 1 – Pricing is a Very Powerful Marketing
Mix Tool
Vignette: Sony wanted to ensure that its PlayStation
2 video-game machine remained more popular than its competitors, Microsoft’s
Xbox and Nintendo’s GameCube. Its solution was to significantly
reduce its retail price.
Featured URL:
www.sony.ca
Pricing Can Be Changed Quickly
Sony released PlayStation 2 in the United States in late 2000, a full
year before Microsoft and Nintendo shipped their versions of this video-game
console. Its initial selling price was $299. By the time Microsoft launched
Xbox and Nintendo launched GameCube, PlayStation 2 controlled 82% of the
video-game market. Sony was determined to stay on top of this market.
It elected to use the pricing component of the marketing mix in order
to quickly counter its new rivals and disrupt their launch strategies.
Xbox was launched with a price of $299, matching PlayStation 2’s
initial selling price, but GameCube was launched with an initial selling
price of $199. Sony reduced its price to $199, negating Nintendo’s
price advantage and undercutting Microsoft by a full $100.
Activity
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Tour the featured Web site for Sony Canada. Look specifically at
the PlayStation
and videogame portion of the Web site. You may also want to look at
the competitor’s Web sites at www.xbox.com
and www.gamecube.com.
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Based on the information provided above and on your tour of these
Web sites, how would you classify the market structure of the video-game
console market? Is it an example of pure competition, monopolistic
competition, oligopoly, or monopoly? What about the video-game market
— is it pure competition, monopolistic competition, an oligopoly,
or a monopoly?
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How responsive do you think that the people in the video-game console
market are to price changes? Would you characterize this market as
elastic or inelastic? Does the video-game market have the same degree
of elasticity, more elasticity, or less elasticity as the console
market? Your answers should take into account the “determinants
of elasticity” reviewed in the text.
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Price theory assumes that companies set prices that result in maximum
profitability on a given product or product line. Given your assessments
of the types of market structures and degree of elasticity that Sony,
Microsoft, and Nintendo have to deal with in the video-game console
and video-game markets, do you think any of these companies are strictly
oriented toward profit maximization? Is it possible that they seek
to maximize their profits in one of these markets, but not the other?
Resources
Information about pricing methods:
World
Energy Counci:
– an overview of pricing approaches used in the electric supply
industry under different market structures
Medical
Distribution:
– a paper arguing against the use of cost-plus pricing
in the medical supplies industry
Marginal
cost analysis – a paper documenting a marginal cost analysis
of the pipeline industry
Bonneville
Power Association:
– a paper documenting a marginal cost analysis conducted for Bonneville
Power Association to determine its 2002 wholesale power rate
Exercise 2 – Pricing at the Local Level
Featured URL: www.psrc.org/projects/pricing/options.pdf
Updating a Transportation Pricing System
Activity
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The featured
Web site is an issue paper released by the Puget Sound Regional
Council in the State of Washington discussing their need to reform
the pricing of the public transportation available in the region.
As you read the paper, note how many different types of transportation
prices the Council must deal with as it attempts to reform its pricing
approaches.
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Recognizing that the Puget Sound Regional Council is a governmental
body and therefore not profit-oriented, which type of pricing approach
does this paper ultimately recommend — cost-plus, marginal cost,
or market-based — and why?
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