High Prices v. High Unit Sales

This article from the WSJ is a good example of the choice firms face when deciding what price to charge: high margins or high volume? How would you determine whether the discounts are helping or hurting AT&T?

Amazon increases the price for Prime

This article from the WSJ reports that Amazon is increasing the price of its Prime service from $79/year to $99/year. It is a good introduction to pricing, elasticity, and behavioral economics.

If the does not work, conduct a Google search on the title.

SUMMARY: Amazon plans to raise the rate for Prime membership to $99 a year from $79, the first price increase for the shipping and video-streaming service. The Seattle retailer said the 25% increase was needed to offset rising delivery and content-acquisition costs. As a result of the 25% price increase, "analysts said they expect fewer than 10% of the more than 20 million Prime members to drop their accounts."

CLASSROOM APPLICATION: Instructors can use the article to present the price elasticity of demand for Amazon Prime services, and also present the reason Amazon is increasing the price of the service.

QUESTIONS: 
1. (Advanced) According to the data presented in the article, what is the possible range of the price elasticity of demand for Amazon Prime?

2. (Introductory) Why is Amazon raising the price of its Prime service? Is it an increase in cost of providing the service or an increase in demand?

3. (Advanced) Under what condition would it be profitable for Amazon to price Prime at below the marginal cost of providing the service?

labels= elasticity, pricing, behavioral economics

Price elasticity and ebooks

This article in the New Yorker reports that Amazon wants Hachette to reduce the prices for most ebooks it offers through Amazon and to increase the percentage of the price paid to authors from 25% to 35%. It is a great introduction to elasticity and pricing.

1. What is the arc-price elasticity if Amazon is correct when it wrote, "for every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99." 
2. Would revenue rise if Hachette cuts price from $14.99 to $9.99?
3. Who gains and who loses if price decreases from $14.99 to $9.99, the percentage retained by the author increases from 25% to 35%, Hachette's share falls from 45% to 35%, and Amazon's share remains constant at 30%? Assume that the marginal cost of an additional download of an ebook is $0.
4. Are the interests of Hachette, the authors, and Amazon aligned over what price to charge?
5. Are the interests of Hachett, the authors, and Amazon aligned over how to share revenues and (fixed) costs?
6. Why does Amazon advocate that some books be sold at prices in excess of $9.99? 

See this post to learn what happened.

labels= elasticity, pricing

Competition, strategies, and UPS's profit margin

This article from the WSJ reports that UPS has seen its profit margin decrease as e-business deliveries quadrupled. Some juicy quotes follow.

"Because of the ubiquity of free shipping, fierce competition from other delivery services and Amazon's power to drive down shipping costs as it gets even more enormous, UPS's average revenue on each Internet-related package it handles is dropping.

"UPS is under more pressure than FedEx Corp. and the U.S. Postal Service because UPS is the biggest e-commerce carrier and its two rivals dived into the business later with narrower strategies.

labels = elasticity, pricing, strategy

Another great article

"This article in FiveThirtyEightEconomics covers supply and demand, elasticity, and several other fascinating ideas on the secondary Nike Shoe market".       

Label = supply and demand, elasticity

Pricing, elasticity, and sunk costs in the wireless industry

Google, Cablevision Challenge Wireless Industry's Business Model

by: Ryan Knutson, Alistair Barr, and Shalini Ramachandran
Jan 27, 2015
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 
TOPICS: Innovation
SUMMARY: Google and Cablevision Systems are preparing new cellphone services that would turn the wireless industry's business model on its head, increasing pressure on companies already dealing with a price war. Related article: Cablevision's service, dubbed "Freewheel," will take advantage of the 1.1 million Wi-Fi hot spots the company has deployed in its greater New York service area since 2007.
CLASSROOM APPLICATION: Students can conjecture about the effect of the introduction of wireless service using Wi-Fi hot spots and cellular connections on the price of wireless service.
QUESTIONS: 
1. (Advanced) Distinguish the types of consumers who use 'Wi-Fi only,' 'Wi-Fi first,' and cellular wireless service. Conjecture on the price elasticities of demand for these different types. How would the consumer price elasticities of demand affect the equilibrium prices of these services?

2. (Introductory) How would the increasing popularity of 'Wi-Fi only' service affect the equilibrium prices of cellular service?

3. (Advanced) What are "sunk costs"? Are the costs of constructing cellular networks fixed and sunk? How do large fixed and sunk costs required to offer a service affect entry into an industry? How does limited entry affect equilibrium prices?

4. (Advanced) What is "normal economic profit"? Does the limited entry resulting from large fixed costs of entry imply that the firms operating in an industry earn above normal economic profit? Are cellular companies earning above normal economic profit?

Reviewed By: James Dearden, Lehigh University

labels = elasticity, pricing

Labor negotiations

Why does the UAW typically negotiate with companies sequentially rather than simultaneously?

Why did they negotiate simultaneously in this round?

Union Talks With Auto Makers to Focus on Tiered Pay
by: Christina Rogers
Jul 13, 2015
Click here to view the full article on WSJ.com

TOPICS: Negotiation, Unions

SUMMARY: A ritual called the "handshake" is expected to open talks Monday between the UAW and Detroit car makers, but the sides are bitterly divided over a pay structure the union says enriches the companies at workers' expense.

CLASSROOM APPLICATION: Instructions can use the article to present issues about union labor negotiations, specifically the effect of union wages on employment levels and union negotiation strategy.

QUESTIONS: 
1. (Introductory) In the current round of labor negotiations in the U.S. auto industry which of the Big Three auto makers is the UAW likely to negotiate with first?

2. (Advanced) Why is the two-tier wage system contentious? What is the effect of the system on the number of U.S. automobile industry factory jobs?

3. (Advanced) Why does Fiat Chrysler have a lower all-in hourly compensation than does GM and Ford?

Reviewed By: James Dearden, Lehigh University

Game theory