economics of marketing management
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M224 Managerial Economics
Economics of Marketing Management
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Marketing activities include developing, pricing,and promoting goods and services
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Demand interdependencies
When the demand of one product affects theother
Different brands of the same product
A price change in good 1 demand shift ingood 2
Positive or negative
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Demand interdependencies
Decision criterion:
if a decrease in profit from good 1 (due to aprice decrease) is more than offset by increase
in profit from good 2, the decision to increaseprice of good 1 is acceptable
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Joint products
Products are related in production
Producing one results in some quantity of theother
In some cases, one is a by-product of the other(and has much less commercial value)
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Temporal demand interdependency
Current price of product affects demand atsome future period
Promotional pricing
market penetration strategy
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Multiple markets
Firm sells a product in two or more markets,each with its own distinctive characteristics
Price elasticity of demand may vary from one
market to another Logical move for firm treat markets differently
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Multiple markets
Shifting output from one market to another mayalso increase revenues
Total output, total cost remain the same
Reallocation to another market stops whenmarginal revenues are equal
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Marketing mix
strategies designed to develop new markets orexpand existing ones
four Ps: price, promotions, product, place
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Pricing strategies
Typical usage of 'rules of thumb'
Accurate estimates can be costly
Periodic changes in pricing due to undesirable
performance or as response to changing demand,costs, technology
Feasible range of prices
Higher than AVC (short-run)
Higher than AC (long-run)
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Pricing strategies
Mark-up pricing
Widely used
Adding a fixed percentage to variable or total cost
per unit Typically low mark-up for fast moving items and for
highly competitive goods
Typically high mark-up for specialized, monopolized
goods and services
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Pricing strategies
Mark-pricing
Commonly determined using trial and error
Optimal mark-up can be calculated consistent
with MR = MCrule Can be costly
Crude estimates are acceptable if these estimates yieldsatisfactory levels of profit
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Pricing strategies
Target-profit pricing
Setting price level where the desired level of profitwill be realized
Commonly used among public utilities, other goodsthat are subject to regulatory profit constraints
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Pricing strategies
Break-even analysis
Criticized by economic purists
deviates from the MC = MRrule
does not consider reactions of competitors
Praised for its flexibility
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Pricing strategies
Limit pricing
Entry-preventing strategy
Setting price at low levels to discourage new entrants and
potential competitors Expectation of increased demand in the future
Existing firm has cost advantage over potential entrants(i.e. economies of scale, superior technology)
Predatory pricing
Firm lowers price to weed out inefficient competitors
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Advertising
Major component of promotion
Aim: to increase demand of a product or service
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Advertising
An increase in advertising budget is acceptableif the corresponding revenues exceedproduction and distribution costs by an amountat least equal to advertising outlay
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Advertising
Can be used as a defense strategy
to strengthen customer loyalty
more difficulty for firms to enter the industry
means to arrest falling demand, decline inprofits
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Advertising
Reactions of competitors may dampenexpected revenue
In oligopolistic markets, interaction among firms
may be intense
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Advertising
Evaluating interaction effects
Cross elasticity of advertising
proportionate change in competitor's advertising
outlay with respect to change in firm's advertisingoutlay
Cross advertising price elasticity
proportionate change in competitor's price with
respect to change in firm's advertising outlay Own elasticity of advertising
proportionate change in quantity of product soldwith respect to change in firm's advertising outlay
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Advertising
Spillover effects
may affect sales and profitability of firm'sother products and services
may affect demand in the next time period
must be included in the analysis
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Advertising
As an investment
lagged effect on sales
Takes time for buyers to respond
generates stream of contributions to profitand overhead costs over an extended period oftime
similar to investing in machinery andbuildings
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Product strategy
Product development
physical and qualitative changes in theproduct
ranges from minor modifications to majortransformations in product design andspecifications
evolving product characteristics Quality most important aspect of product
development
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Product strategy
Decision rule
expected increase in net contribution to profitis greater than increase in expenditure on
product quality net contribution to profit = revenues lessproduction and distribution costs
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Marketing mix
May have high degree of interaction andinterdependency
Revenue
negatively related with price movementalong the demand curve
advertising and quality shift in demand
curve (change in revenues move in samedirection)
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Marketing mix
Costs
production and distribution costs vary withoutput level, which in turn depends on price
advertising costs
costs associated with product quality
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Reference
Poblador, Niceto S. (1998) The Economics of theFirm: Managerial Applications, UP Press QuezonCity.