​In this short revision video we look at a range of business objectives and how they affect the price that might be charged to consumers. Key revision points: Objectives often driven by managerial motives Interdependent behaviour in an oligopoly - firms must consider the likely reactions of rivals Most businesses are satisficers rather than maximisers Regulatory interventions do matter e.g. price capping More firms now use big data to drive revenues Consumers are increasingly sensitive to issues surrounding fair / ethical pricing

1. Business Objectives and
Pricing Strategies
A2 Micro

2. Profit
Maximisation
Sales Revenue
Maximisation
Business Growth
/ Market Power
Business Survival
in a recession
Not For Profit
Social Enterprises
State-Owned
Businesses
Different Business Objectives

3. Overview on Objectives and Pricing
Objectives often driven by managerial motives
Interdependent behaviour in an oligopoly
Most businesses are satisficers
Regulatory interventions do matter
More firms use big data to drive revenues
Consumers are sensitive to fair / ethical pricing

4. Marginal profit is the increase in profit when one more unit is sold
MCPrice,
Cost
Output
MR
Marginal
profit is
positive
Positive Marginal Profit

5. MCPrice,
Cost
Output
MR
Marginal
profit is
positive
Marginal
profit is
negative
Marginal profit is the increase in profit when one more unit is sold
Negative Marginal Profit

6. MCPrice,
Cost
Output
MR
Marginal
profit is
positive
Marginal
profit is
negative
Profit
maximised
here
Marginal profit is the increase in profit when one more unit is sold
Marginal Profit =0 at Profit Max Output

7. MCPrice,
Cost
Output
AC
MR
AR
(MR=MC) Q1
P1 is the profit maximising price and output is Q1
P1
Showing Profit Maximisation

8. MCPrice,
Cost
Output
AC
MR
AR
(MR=MC) Q1
Total profit = (P1 – C1) x Q1
P1
C1
Showing Total Profit

9. MCPrice,
Cost
Output
AC
MR
AR
(MR=MC) Q1
This diagram shows supernormal profits i.e. P>AC
P1
C1
Profit
Supernormal Profit
Showing Supernormal Profit

10. MC
Price
and
Cost
Output
AC
MR
AR
Revenue Max: MR=0
P1
C1
Maximising Total Revenue (MR=Zero)

11. When a business sells as much as possible without making a loss
MC
Price
and
Cost
Output
AC
MR
AR
Sales Max is at an output where AR=AC
At this output, normal profits are made
P1
Q1
Sales Maximisation (AC=AR)

12. MC
Price
and
Cost
Output
AC
MR
AR
Possible satisficing price
P1
Q1 Q2
P2
C2
Objective: Profit Satisficing

13. Summary – Business Pricing & Objectives
Business Objective Price at an output where
Profit maximisation Marginal revenue = marginal cost
Revenue maximisation Marginal revenue = zero
Sales maximisation Average revenue = average cost
Satisficing
Any price > or = average cost but less
than the profit maximising price
Limit pricing
Price at which a potential rival cannot
make normal profit if they enter

14. Price Discrimination / Dynamic Pricing
• Charging different prices for each individual unit purchased
– i.e. people pay their own individual willingness to pay
1st degree
• Prices varying by quantity sold e.g. bulk purchase discounts
• Prices varying by time of purchase e.g. peak-time prices
2nd degree
• Charging different prices to groups of consumers
segmented by price elasticity of demand, income, age, sex
3rd degree

15. Hurdle Model of Price Discrimination
Cheaper prices for
nearly new products
Discounts for those
prepared to collect
coupons
Cheaper paperbacks
published after the
hardback release
Once used or
remainder stocks of
computer games
Discount ticket booths
for stand-by / last-
minute purchasers
Discounts only for
customers who visit the
store on a given day

16. Business Objectives and
Pricing Strategies
A2 Micro