ECON 208 Lecture Notes - Lecture 7: Congestion Pricing, Arbitrage, Adwords

22 views3 pages
Eco Lecture
Great uses for price optimization software.
1.1.1. Avoiding overcrowding. One optimal use for IT pricing software systems is when there is an
externality problem. A good example is road congestion pricing, where a city prices roads higher during
peak hours to deter drivers from driving then. This is also the case for water parks, theme parks and so
on. These are examples of goods that have a very high fixed capacity and highly variable demand,
leading to congestion at certain times that they need to manage.
1.1.2. Avoiding spare capacity.
The most expensive thing in a restaurant is an empty table
Most firms want to operate at something close to full capacity whenever they can. By booking a hotel
room, I am directly preventing another customer from taking that hotel room. This trade-off between
pricing a room low and selling it now against waiting and potentially selling a room at the last minute for
a higher price, has given rise to the practice of revenue management.
Revenue can be improved by:
• Identifying new pricing fences
• Preventing arbitrage across existing pricing fences
• Improving customer perceptions of pricing fairness
Generally most success stories outside of industries with fixed capacities rest on a better understanding
of price elasticities. Theoretically, optimization systems could optimize over cost schedules, but I have
come across no software systems that do this very well primarily because managers simply do not know
cost schedules.
Some problems these systems have faced.
(1) Used a price management rather than optimization tool.
• Large departmentstore invested in expensive pricing optimization software. Merchandizing set
key commands on override and used it predominantly to manage the prices that they set using
their ‘super gut’.
(2) Limitations to the use of optimization software created for selling airplane seats in industries that
have no capacity constraints..
• Example of software that created artificial constraints in order to be able to say that it was
optimizing.
Unlock document

This preview shows page 1 of the document.
Unlock all 3 pages and 3 million more documents.

Already have an account? Log in

Document Summary

One optimal use for it pricing software systems is when there is an externality problem. A good example is road congestion pricing, where a city prices roads higher during peak hours to deter drivers from driving then. This is also the case for water parks, theme parks and so on. These are examples of goods that have a very high xed capacity and highly variable demand, leading to congestion at certain times that they need to manage. The most expensive thing in a restaurant is an empty table. Most rms want to operate at something close to full capacity whenever they can. By booking a hotel room, i am directly preventing another customer from taking that hotel room. This trade-o between pricing a room low and selling it now against waiting and potentially selling a room at the last minute for a higher price, has given rise to the practice of revenue management.

Get access

Grade+
$10 USD/m
Billed $120 USD annually
Homework Help
Class Notes
Textbook Notes
40 Verified Answers
Study Guides
Booster Classes
Class+
$8 USD/m
Billed $96 USD annually
Homework Help
Class Notes
Textbook Notes
30 Verified Answers
Study Guides
Booster Classes