ECON 208 Lecture Notes - Lecture 6: Price Ceiling, Real Prices And Ideal Prices, Forego
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Relative to buying two servers from atlantic"s competitor, by buying one doubly e cient server from atlantic, a rm would save ,000 in labor costs, in electricity and ,500 in software licenses. Economic value to the customer (evc) is based on the insight that a customer will buy a product only if its value to them outweighs the value of the closest alternative, or when utilitya utilityb. The utility of a product depends on its value to the customer minus its price. Pricea *v aluea v alueb++priceb pricea differentiation valueab +priceb. Rewriting *v aluea v alueb+ as the di erentiation value between product a and b allows us to summarize product a"s price ceiling as. Therefore, to sell a product, a rm needs to price at or below its competitor"s price plus the value advantage its product has to the customer over the rival product.