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93 Cards in this Set
- Front
- Back
The difference between how an economist and sales manager approach pricing is
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the economist thinks of a profit maximizing price while the sales manager focuses on the list price
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When thinking of pricing, product managers
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focus on product features
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The three levesl of pricing include
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Industry economics, product/market strategy and transaction level prices
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According to the pricing pyramid the foundation of pricing is __________ and the pinnacle is ___________.
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value creation and price level
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Managers need to create a price structure so as to
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so as to cater to heterogeneous customers
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A well designed price policy ensures that
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qualified customers get price breaks
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In determining the price level a manager needs to use
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lots of data and good judgment
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The two objectives of pricing strategy are to
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Ensure profitability and capture consumer value
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Cost plus pricing
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Can lead to overpricing if demand is weak
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The XYZ company's average cost last year was $240 per unit. It priced its product at $300 for a target margin of 20%. A recent drop in demand has resulted in an increase in the average cost to $256. The manager is considering a price increase to $320 to maintain the margin at 20%. In the face of the drop in demand, which of the following is the most appropriate:
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The new contemplated price is probably too high
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Customer oriented pricing requires that we should measure the customer's perceived value for the product, and
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A. Choose a price equal to the value
B. Choose a price below the value C. A or B <- D. Neither A nor B |
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Advertising
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Increases consumer's perceived value by educating the consumers
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A good approach to competitor oriented pricing is
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To take into account differences among competitors
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Managers that pursue market share goals
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Are responding to incentives
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A tactical approach to pricing involves
A- Asking reactive questions B- Making judgments about the right price C- Ensuring that costs are covered and profit objectives are met |
A and C
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Strategic pricing involves asking
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What sales increase would be necessary to profit from a price cut?
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We can get the net profits by
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subtracting fixed costs from gross profits
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Attributes X of a product
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are under the manager's control and affect willingness to pay and variable costs
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WTP depends on
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product attributes and NBA
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The fourth profit lever, in addition to price, fixed cost and variable cost, is
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Volume
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The most important profit lever is
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price
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According to Marn, Roegner and Zawada a 1% improvement in fixed cost increases profits by
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2.7%
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A cell phone manufacturer runs an advertising campaign emphasizing the clarity of the pictures from the camera in the phone. This
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Will probably not affect the consumer's perceived value
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Comparing the Use Value (UV) and the Economic Value (EV)
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EV<UV
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Exchange Value is
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The same as Economic Value
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Steel belted radial tires replaced older tires that had a road life roughly half that of the steel belted ones. As a result consumers did not have to replace tires as often and tire replacement shops saw a decline in the frequency of consumers visiting their stores, in turn cutting into their revenues. This is an example of
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Positive differentiation value to end users
Negative differentiation value to tire replacement shops |
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In calculating economic value
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The differences among consumers in the economic value
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Reference Value
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A. Is the same as outside option
B. Depends on the most suitable substitute 25% C. Varies across consumers D. Requires managerial judgment to assess |
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Economic value
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Is detemined by the extent of consumer benefits
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Comparing Economic Value (EV) and Willingness to Pay (WTP)
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EV + Gap = WTP
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surplus value
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is perceived value less perceived price
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According to the Value Equivalence concept some consumers choose a higher priced product because
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they prefer the benefits offered by it
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As gas prices rise, the position of small cars on the VEL
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would move below the line
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The three steps in arriving at economic value consist of determining
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customer economics, differentiation value and value drivers
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The customer production process includes
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product acquisition, use and disposal
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The key value driver in a new video game is
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benefit of entertainment
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In quantifying value drivers we must ask
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how the product affects the consumer's production process
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A key point to keep in mind when caculating the differentiation value is
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the concept of incremental analysis
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Even though value based segmentation requires the manager to segment the market based on the value different customers attach to the product
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it is necessary to start with descriptive profile
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Not all drivers are created equal refers to the fact that
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some drivers are easier to deliver
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Discriminating value drivers
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are common within a segment
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A good hierarchy of value drivers
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customer needs and internal factors
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Segment descriptors
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can help in communication and distribution
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The price metric used by the local water utility
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is the number of gallons of water used
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A price fence
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allows firms to charge different prices
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Which of htese is NOT a reason for price segmentation
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Differences in price policy
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Segmented pricing can be more profitable than a single price because
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The single price could be too high
Yes.. For some consumers, see slide 4, lecture 6 |
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Segmented pricing requires a fence so that
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it prevents arbitrage
Yes. See slide 7, lecture 6 |
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Which of these is NOT a consideratiton in erecting fences?
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the simplicity
yes. see slide 8, lecture 6 |
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Which of these is an example of buyer ID as a fence?
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Individuals versus libraries
See slides 9-11, lecture 6 |
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It makes sense to offer quantity discounts to cater to buyers of large quantities because
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They represent greater value
Yes. See slide 4, lecture 7 |
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Which of these is NOT a way to implement a non-linear price?
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Learning curve pricing
Yes. See slide 9, lecture 7 |
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Segmented pricing using prodcut design uses as a fence
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A. quality of low end product
B. Price of high end product C. both A and B 100% See slide 4, lecture 8 D. Neither A nor B |
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For bundling to work to implement segmented pricing
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consumers must prefer different products
yes. See slides 6 and 7, lecture 8 |
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The Weber-Fechner effect says that
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Consumers see percentage price differences as meaningful
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Which of these is NOT a way to provide economic value assurance?
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Technical brochures 100% yes. see slide 6. lecture 9
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The highest price in a pocket price waterfall is
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the list price
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Price bands can
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can identify customers for whom price can be increased
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A pricing policy can help in all the following ways EXCEPT
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increase top line
Yes. See slide 6, lecture 10 |
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Reference price can be important because
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perceived value depends on it
yes. see slide 5, lecture 11 |
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A manager who understands the idea of switching costs can
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decrease switching costs to induce trial and raise switching costs to fend off competition
Yes. See slide 7, lecture 11 |
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End benefit effect refers to
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what proportion of the buyer's total cost is the price of the item
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Prospect theory says that
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view losses and gains relative to where they are
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Relevant costs
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Are avoidable
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Accounting figures are often unhelpful for pricing decisions because
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Accountants give importance to sunk costs
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Check the relevant costs from the following
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Opportunity cost
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Percent contribution margin
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Is the leverage between sales volume and profit
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A product that has a low %CM
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Is a candidate for premium pricing
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A manufacturer has the capacity to produce 1000 units on regular time ($ 20 per hour) and an additional 200 units on overtime at 150% of regular time labor costs. The cost of raw materials is $ 10 per unit and labour required is 1 manhour per unit. Current sales are running at 1100 units per day and the price is $ 60. The percent CM is
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33%
Yes, cost is $10 (materials)+$30 (overtime labor cost)=$40. So CM=$20, and price=$60. So, %CM=100*20/60. |
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How would you define Breakeven volume as it applies to pricing decisions?
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When we are evaluating a proposed change, we compare the profits after the proposed change to the current level of profits and calculate the volume required under the proposed change to make the two profits equal. This is the break-even sales volume.
General Feedback: When we are evaluating a proposed change, we compare the profits after the proposed change to the current level of profits and calculate the volume required under the proposed change to make the two profits equal. This is the break-even sales volume. |
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The ABC firm is thinking of cutting the current price of $ 100 by 10%. the current CM is $ 50. The % BE sales volume is
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Impossible to tell
See slide 5, lecture 11 |
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In question 2 assume that the firm is working at capacity. Any increase in production would need overtime and that would add 50% to the current labor cost. Currently labor cost runs at 20% of price. The break-even sales volume in this case would be
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25%
See slide 7, lecture 11 |
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In question 9, suppose the firm is contemplating avoiding overtime by adding a faster machine that is more productive. In this case there would be an additional fixed cost of $ 10,000. The %break-even volume is
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Impossible to tell
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The ABC firm is facing a cmpetitor who has just raised the current price of $ 100 by 10%. ABC is contemplating matching the competitor. The current CM is $ 40. The % BE sales volume is
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-20%
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Pest Control Limited is currently serving 1400 customers per week at an average price of $ 80 per customer. The variable costs are constant at $ 26 and non incremental fixed costs are 40% of current revenue. Pest Control's management believes that more customers could be attracted by a price cut of 5%. BUt there is some hesitation on their part because of demand exceeded 1500 customers there would be additional equipment needed that would raise the capacity by 750 customers but also result in an increase of $ 1400/ week of fixed costs. As a consultant to Pest Control you are required to prepare a break-even table for sales changes from 0 to 20% in steps of 5%.
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unsure
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In a pricing game resembling a prisoners' dilemma
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the equilibrium may be undesirable 100
Yes. See slide 7, lecture 15 |
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Firms can avoid price competition by
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obtaining competitive advantage
yes. see slide 11, lecture 15 |
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all the following are ways of obtaining competitive advantage except
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using game theory
yes. See slide 11, lecture 15 |
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All the following are good ways of reacting to price cuts except
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Match competitor's price
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When a competitor is weak and a price reaction is cost justified the best way to react to a competitor's price cut is to
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attack
yes. See slide 14, lecture 15 |
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Why are price wars bad?
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Equals Profits sensitive to price (100%)
Equals Market shares don't change (100%) Equals Consumers become price sensitive (100%) Equals Firms don't exit industry (100%) |
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Price wars are caused by
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Misreads and misjudgments
. See slide 19, lecture 15 |
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Which of th efollowing is NOT a goal of promotions
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Avoiding price wars
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Which of these is NOT true about promotions
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Promotions are always a result of prisoners' dilemma
Yes. NOT ALWAYS! See slides14-16, lecture 16 |
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Which of these are probably not complements
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Coke and Sprite
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Which of the following is NOT true for a loss leader
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Loss leaders are meant to threaten competitors
Yes. See slides 21 and 22, lecture 16 |
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A consequence of double marginalization is
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Retailers do not pass through the entireyty of a manufacturer price cut
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Which of the following is not likely to help in overcoming double marginalization?
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Negotiations
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The following are all ways of legally practicing resale price maintanence EXCEPT
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coupons
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Skim price is optimal when
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Innovators place high value
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Four consultants have worked on the optimal dynamic pricing strategy for a new integrated circuit that exploits experience curve. Which is the most reasonable, in your opinion?
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Prices: {50, 49, 48, 45, 42, 38, 35, 33}
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The part worth of price tells us
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how much value a consumer places as price is changed
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Conjoint analysis can be used for
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A. optimizing the price
B. segmenting the market C. neither A nor B D. both A and B |