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Lecture 5

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Economics (Arts)
ECON 208
Paul Dickinson

Eco Lecture (1) Uncertainty Effect: Uncertainty over realization of attributes • For example, a new anti-dandruff shampoo was unable to command a price premium because its claims could not be verified by experts and consumers knew that its effectiveness would vary. (2) Newness Effect: Attributes are new and therefore hard to understand • For example, Boxee is a ‘freeware cross-platform media center software with social networking features that is a fork of the open source XBMC media center software with some custom and proprietary additions’. Since customers are unlikely to understand the value that implies, they may have to price below EVC when they release their hardware (allegedly) in 2010. • Make clear this is temporary. 1969 study: Five brands in two stores. One had discount from initial price, other had no sign of discount. In all five cases, the store that had marked the discount as being from the list price did better in the long run. (3) Expenditure effect: When it is a larger proportion of expenditure. • For example, an industrial carpet cleaner could charge higher prices to office managers than dedicated office cleaning companies. (4) When it is ethically right or legally appropriate to do so • Bottled water priced at $35 for a 12 pack during Hurricane Rita • North Carolina ‘Price Gouging Law’. North Carolina defines price gouging as intentionally charging an unreasonably excessive price un­ der the circumstances for goods or services that are used by North Carolinians during an emergency to preserve, protect or sustain life, health, safety or economic well-being. May wish to price below EVC for strategic reasons if. (1) Winner-takes-all market (2) Initial Customer Lock-In (3) Pre-empt competitive response Using EVC as a Pricing Formula It is best to use EVC as a pricing formula • When competitor’s prices are well-known and concrete • When a product’s differentiation value is easy to calibrate • When a product’s differentiation value is easy and believable to communi­ cate The Atlantic Computing example is an almost ideal setting for the use of EVC as a formula. The ideal setting for the use of EVC as a formula is one where the seller knows precisely how the customer will use the product, and intimate details of their likely cost savings or net benefits of using the technology. This generally implies a man­ ufacturing
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