week 5 continued

Question 1

What does the Netflix 2011 case teach us?

Answer 1

Netflix split streaming and DVD into two separate paid plans, which made customers lose some consumer surplus but gave Netflix more producer surplus (more profit).
👉 Like a gym that used to include pool + weights in one membership, then charges separately — you get less “deal,” but they earn more.

Question 2

What does the Stella Artois “$1.25 extra” ad show?

Answer 2

It signals that the beer’s perceived value is so high that even paying more feels like a good deal.
🍺 Analogy: Like a fancy restaurant charging more to signal it’s exclusive and high quality.

Question 3

What is price discrimination?

Answer 3

Charging different prices to different customers for the same product.
💰 Analogy: Like airlines charging different prices for the same flight depending on when and how you book.

Question 4

What are the 3 degrees of price discrimination?

Answer 4

First-degree: Charging each buyer their maximum willingness to pay.
🎯 Analogy: Like a street vendor haggling with every customer individually.

Second-degree: Prices based on quantity or version bought (bulk discounts).
📦 Analogy: Costco giving lower prices if you buy a big pack.

Third-degree: Prices vary by customer group (age, status).
🎟️ Analogy: Student and senior discounts at the movies.

Question 5

Why do outlets and boutiques both exist?

Answer 5

Outlets target price-sensitive customers, while boutiques in cities sell to less price-sensitive ones → a form of price discrimination.
👗 Analogy: Like selling the same clothes cheaper in a warehouse and pricier in a luxury mall.

Question 6

What makes customers less price sensitive?

Answer 6

When buyers don’t know substitutes exist (like thinking there’s only one taxi app instead of Uber & Lyft).

When purchases are small compared to budget (like buying chewing gum, you don’t care much if it costs €1.50 or €2).

When someone else pays part of the cost (like insurance covering hospital bills).

When it’s a prestige product (like Rolex watches).

When buyers are different types (tightwads vs. spendthrifts).

When new payment methods reduce “pain” (credit cards, Apple Pay).

Question 7

What is loss leader pricing?

Answer 7

Selling a product at or below cost to attract customers, so they buy more expensive products later.
Analogy: Like selling the razor handle cheap, but making profit on blades sold later. Same with Nespresso machines (cheap machine, expensive coffee pods).
Example: Milk placed far away in grocery stores to make you walk past and buy other things.

Question 8

What is Competitive Pricing?

Answer 8

Competitive pricing is a strategy where a company sets the price of its products or services based on what its competitors are charging for similar items in the same market. This approach aims to attract and retain customers by staying in line with market prices, often by matching or slightly undercutting competitors’ prices to gain market share. not to maximize surplus.
👉 Analogy: Like fast-food chains battling with €0.99 menus just to get customers through the door.

Question 9

How do companies respond to a price war?

Answer 9

Offer to price-match or show cost advantage (like Walmart saying “we’ll match any competitor’s price”).

Emphasize risks of cheap products (fear, uncertainty, doubt = “FUD factor”).

Hide individual prices with bundles (like fast-food meal deals where you don’t know fries price separately).

Question 10

What is Markup Pricing?

Answer 10

dding a fixed percentage to the cost of a product.

Easy to calculate, doesn’t look at demand or perceived value.

Popular even though not always optimal.
👉 Analogy: Like a shopkeeper saying, “I’ll always add 30% profit on top of my cost price, no matter what.”

Question 11

What are distribution channels?

Answer 11

A set of interdependent organizations that make a product or service available to consumers. Can go:

Manufacturer → Consumer

Manufacturer → Retailer → Consumer

Manufacturer → Wholesaler → Retailer → Consumer

Question 12

How do wholesalers add value for producers and retailers?

Answer 12

Provide sales forces to reach small customers cheaply

Producers (factories, brands) often don’t have the time or money to sell to thousands of small stores directly.

Wholesalers already have sales teams and relationships with those stores.

👉 Example: A small candy shop won’t order directly from Mars (Snickers). Instead, a wholesaler delivers multiple candy brands at once.

2. Hold inventory (reduce risk/costs)

Producers don’t have to stockpile goods or handle storage → wholesalers take care of warehouses.

Retailers don’t need to buy huge quantities or worry about running out → they can reorder quickly from wholesalers.

👉 Example: A supermarket can order 50 cases of Coca-Cola at a time instead of a full truckload directly from Coca-Cola.

3. Offer bulk savings and break them into smaller units

Producers usually want to sell in large batches (efficient for factories).

Wholesalers buy in bulk at low cost, then split into smaller lots so retailers can afford to buy.

👉 Example: A wholesaler buys 10,000 toilet paper rolls from a factory, then resells packs of 100 to small local shops.

Question 13

How do intermediaries reduce the number of transactions?

Answer 13

Instead of every producer dealing with every consumer, intermediaries connect them, making the process simpler and cheaper.
👉 Analogy: Instead of every farmer knocking on your door, you just go to the supermarket.

Question 14

How do intermediaries add value for consumers?

Answer 14

Save search time.

Fix mismatch: producers make large amounts of few goods, but consumers want small amounts of many goods.
👉 Analogy: Costco lets you buy 1 pack of many things instead of visiting 50 factories.

Question 15

Why do wholesalers like Costco have power over big brands?

Answer 15

Because they control consumer access. If Costco refuses to stock Coca-Cola, Coke loses a huge distribution channel and hurts its brand image.
👉 Analogy: Like Netflix removing a popular TV show — fans blame the studio, not Netflix.

Question 16

What is the “most obvious remedy” for manufacturers to gain control of distribution?

Answer 16

Vertical integration — controlling other stages of the channel.
Problems:

Less variety, less convenient for consumers.

Manufacturers/retailers lose specialization advantages. (Loss of specialization advantages → Wholesalers and retailers are good at logistics, customer service, and merchandising. If manufacturers try to do everything themselves, they might be less efficient.)

Centralized decision-makers may lack expertise.

Question 17

What are the two types of vertical integration?

Answer 17

Forward integration: Taking over distribution/retail (e.g., Apple running its own Apple Stores).

Backward integration: Taking over supply/production (e.g., Starbucks buying a coffee farm).

Question 18

What are some reasons for vertical integration?

Answer 18

More control over product quality.

Less dependence on suppliers.

Lower prices.

More clarity to customers.
👉 Analogy: Owning the whole pizza-making process (farm → oven → restaurant) so you control taste, cost, and branding.