Pricing strategy

[David Song]

his notes on "Pricing" is confusing to say the least :-( I've tried
reading the notes and googling around, here's my thoughts on how to
answer his questions such as "is price too high/low".
The pricing strategy should focus on the equation: P = (Ep / Ep+1) *
Mc, that's what TA wrote on the board on saturday. so the data points
we need to do that equation are: price elasticity and Marginal Cost.
Price should change only if Ep or MC changes.
Here's my take on his pricing slides. page 2 says the optimal price
should be when output is at MC=MR. then he goes on from pages 3 to 12
refuting his initial claim, that need to look at both demand (Ep) and
MC, so that Contribution Margin is largest as possible. Then he
refutes this 2nd claim again on page 18, saying don't look at largest
CM, look at MC=MR. Isn't this circular logic?

[Xiuya Li]

My understanding is we should seek profit maximized pricing, where MC=MR, to fill up that yellow triangle from the slides. P=(Ep/Ep+1)*MC should match with MC=MR rule where we assume Ep is not constant along the demand curve (going up and down along the pricing/Q curve).

 

Ted