Economics of Marketing Management

7/29/2019 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.

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Economics of Marketing Management