Course Syllabus

Course Information

MKT 6336.501 - Pricing

Tuesday 7 – 9:45 pm, SOM 2.804, Fall 2007

Professor Contact Information

Instructor: Prof. Ashutosh Prasad

Tel: (972) 883-2027
E-mail: aprasad@utdallas.edu
Office: SOM 3.221
Office Hours: M 4:00 - 7:00pm; or by appointment

Course Pre-requisites, Co-requisites, and/or Other Restrictions

MKT 6301 or permission of the instructor

Course Description

Pricing is the element of the marketing mix that determines revenues and profits. However, even large
firms frequently price suboptimally. We will examine microeconomic, strategic and psychological
considerations in determining the correct pricing for products and services. We will cover price-setting
techniques in various monopoly and competitive situations. There are many different pricing strategies -
skimming, bundling, versioning, auctions etc. - that will be covered together with a discussion of the
circumstances under which to use them. The course will use a combination of lectures, discussions, and
exercises. It is an essential course for managers who ultimately have to set prices, and for marketing
consultants.

Student Learning Objectives/Outcomes

- Students will understand and appreciate the role of pricing in the marketing mix.

Students will learn methods for pricing goods and services contingent on product and market
characteristics, to increase the profitability of the firm.

- Student will learn to incorporate quantitative methodologies to solving marketing problems

Required Textbooks and Materials

Power Pricing, by Robert Dolan and Herbert Simon. Publisher: Free Press 1996.

Course Syllabus Page 1

Cases
American Airlines Value Pricing (A), Harvard Business School Case
Cambridge Software Corporation, Harvard Business School Case
The case packet should be available from Off-Campus Books.

Overheads
Overhead slides in MS PowerPoint are available from the webpage
www.utdallas.edu/~aprasad/teaching.html.
The login and password will be announced in class.

Suggested Course Materials

The following are optional readings. They are available from the UTD library or full-text online from the
UTD library web page.

Davey, Childs, Carlotti Jr. (1998), “Why your price band is wider than it should be,” McKinsey Quarterly,
1998, 3, 116-127.
Eppen, Hansen, Martin (1991), “Bundling – New products, new markets, low risk,” Sloan Management
Review, Summer, 7-14.
Garda (1992), “Tactical pricing,” McKinsey Quarterly, 1992, 3, 75-85.
Marn, Roegner, Zawada (2003), “Pricing new products,” McKinsey Quarterly, 2003, 3.
Rao, Bergen, Davis (2000), “How to fight a price war,” Harvard Business Review 78, 2, 107-115.
Shapiro, Varian (1998), “Versioning: The smart way to sell information,” Harvard Business Review 76, 6,
107-115.
Thaler (1985), “Mental accounting and consumer choice,” Marketing Science 4, 3, 199-214.

Assignments & Academic Calendar

Date Topics Readings / HW Due

Session 1 • Introduction to pricing, Syllabus review • DS Chapters 1, 2

Tue, Aug 21 • Cost analysis, Break-even analysis • Davey et al. 1998

Session 2 • Excel & Calculus tutorial

Tue, Aug 28

Session 3 • Conjoint analysis • DS Chapter 3

Tue, Sep 4

Session 4 • Demand curve, elasticity • DS Chapters 3, 8

Tue, Sep 11 • Monopoly pricing HW 1 due

Session 5 • Product-line pricing

Tue, Sep 18 • Psychological pricing • Thaler 1985

Session 6 • Competitive pricing • DS Chapters 4

Tue, Sep 25 • Game theory • Garda 1992
• Rao et al. 2000
HW 2 due

Course Syllabus Page 2

Session 7 • Review HW 3 due
Tue, Oct 2 • Case: American Airlines Value Pricing (A) HW 4 due

Session 8
Tue, Oct 9 Midterm Exam

Session 9 • Price customization • DS Chapter 5

Tue, Oct 16

Session 10 • Versioning • DS Chapter 7

Tue, Oct 23 • 2-part tariff • Shapiro &Varian 1998

Session 11 • Bundling • DS Chapters 9

Tue, Oct 30 • Case: Cambridge Software Corporation • Eppen 1991
HW 5 due

Session 12 • Dynamic pricing • DS Chapter 10, 11

Tue, Nov 6 • Pricing and promotion HW 6 due

Session 13 • Auctions
Tue, Nov 13

Session 14 • Channel and delegation

Tue, Nov 20 • Synopsis and Review

Session 15
Tue, Nov 27 Exam week (11/27-12/03)

Grading Policy

Activity Score
Homework 30%
Midterm Exam 30%
End term exam 30%
Attendance & CP 10%

Grade scale: A (90%+), B (80%+ to 90%), C (70%+ to 80%), F (<70%). Any grade dispute
should be submitted in writing within one week of the assignment of the grade. Assignments are
due at the beginning of class. Late submissions will not be accepted.

Course & Instructor Policies

Students are expected to attend all sessions and to have read and reflected on the material to be
covered in class. Two absences are allowed without penalty. Thereafter, subtract two points for
each absence. Extra credits opportunities, if needed, will be announced after the midterm.

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Student Conduct & Discipline

The University of Texas System and The University of Texas at Dallas have rules and regulations
for the orderly and efficient conduct of their business. It is the responsibility of each student and
each student organization to be knowledgeable about the rules and regulations which govern
student conduct and activities. General information on student conduct and discipline is contained
in the UTD publication, A to Z Guide, which is provided to all registered students each academic
year.

The University of Texas at Dallas administers student discipline within the procedures of
recognized and established due process. Procedures are defined and described in the Rules and
Regulations, Series 50000, Board of Regents, The University of Texas System, and in Title V,
Rules on Student Services and Activities of the university’s Handbook of Operating Procedures.
Copies of these rules and regulations are available to students in the Office of the Dean of
Students, where staff members are available to assist students in interpreting the rules and
regulations (SU 1.602, 972/883-6391).

A student at the university neither loses the rights nor escapes the responsibilities of citizenship.
He or she is expected to obey federal, state, and local laws as well as the Regents’ Rules,
university regulations, and administrative rules. Students are subject to discipline for violating the
standards of conduct whether such conduct takes place on or off campus, or whether civil or
criminal penalties are also imposed for such conduct.

Academic Integrity

The faculty expects from its students a high level of responsibility and academic honesty. Because
the value of an academic degree depends upon the absolute integrity of the work done by the
student for that degree, it is imperative that a student demonstrate a high standard of individual
honor in his or her scholastic work.

Scholastic dishonesty includes, but is not limited to, statements, acts or omissions related to
applications for enrollment or the award of a degree, and/or the submission as one’s own work or
material that is not one’s own. As a general rule, scholastic dishonesty involves one of the
following acts: cheating, plagiarism, collusion and/or falsifying academic records. Students
suspected of academic dishonesty are subject to disciplinary proceedings.

Plagiarism, especially from the web, from portions of papers for other classes, and from any other
source is unacceptable and will be dealt with under the university’s policy on plagiarism (see
general catalog for details). This course will use the resources of turnitin.com, which searches the
web for possible plagiarism and is over 90% effective.

Email Use

The University of Texas at Dallas recognizes the value and efficiency of communication between
faculty/staff and students through electronic mail. At the same time, email raises some issues
concerning security and the identity of each individual in an email exchange. The university
encourages all official student email correspondence be sent only to a student’s U.T. Dallas email
address and that faculty and staff consider email from students official only if it originates from a
UTD student account. This allows the university to maintain a high degree of confidence in the
identity of all individual corresponding and the security of the transmitted information. UTD
furnishes each student with a free email account that is to be used in all communication with
university personnel. The Department of Information Resources at U.T. Dallas provides a method
for students to have their U.T. Dallas mail forwarded to other accounts.

Course Syllabus Page 4

Withdrawal from Class

The administration of this institution has set deadlines for withdrawal of any college-level courses.
These dates and times are published in that semester's course catalog. Administration procedures
must be followed. It is the student's responsibility to handle withdrawal requirements from any
class. In other words, I cannot drop or withdraw any student. You must do the proper paperwork
to ensure that you will not receive a final grade of "F" in a course if you choose not to attend the
class once you are enrolled.

Student Grievance Procedures

Procedures for student grievances are found in Title V, Rules on Student Services and Activities,
of the university’s Handbook of Operating Procedures.

In attempting to resolve any student grievance regarding grades, evaluations, or other fulfillments
of academic responsibility, it is the obligation of the student first to make a serious effort to
resolve the matter with the instructor, supervisor, administrator, or committee with whom the
grievance originates (hereafter called “the respondent”). Individual faculty members retain
primary responsibility for assigning grades and evaluations. If the matter cannot be resolved at
that level, the grievance must be submitted in writing to the respondent with a copy of the
respondent’s School Dean. If the matter is not resolved by the written response provided by the
respondent, the student may submit a written appeal to the School Dean. If the grievance is not
resolved by the School Dean’s decision, the student may make a written appeal to the Dean of
Graduate or Undergraduate Education, and the deal will appoint and convene an Academic
Appeals Panel. The decision of the Academic Appeals Panel is final. The results of the academic
appeals process will be distributed to all involved parties.

Copies of these rules and regulations are available to students in the Office of the Dean of
Students, where staff members are available to assist students in interpreting the rules and
regulations.

Incomplete Grade Policy

As per university policy, incomplete grades will be granted only for work unavoidably missed at
the semester’s end and only if 70% of the course work has been completed. An incomplete grade
must be resolved within eight (8) weeks from the first day of the subsequent long semester. If the
required work to complete the course and to remove the incomplete grade is not submitted by the
specified deadline, the incomplete grade is changed automatically to a grade of F.

Disability Services

The goal of Disability Services is to provide students with disabilities educational opportunities
equal to those of their non-disabled peers. Disability Services is located in room 1.610 in the
Student Union. Office hours are Monday and Thursday, 8:30 a.m. to 6:30 p.m.; Tuesday and
Wednesday, 8:30 a.m. to 7:30 p.m.; and Friday, 8:30 a.m. to 5:30 p.m.

The contact information for the Office of Disability Services is:

The University of Texas at Dallas, SU 22
PO Box 830688
Richardson, Texas 75083-0688
(972) 883-2098 (voice or TTY)

Essentially, the law requires that colleges and universities make those reasonable adjustments
necessary to eliminate discrimination on the basis of disability. For example, it may be necessary
to remove classroom prohibitions against tape recorders or animals (in the case of dog guides) for

Course Syllabus Page 5

 students who are blind. Occasionally an assignment requirement may be substituted (for example,
a research paper versus an oral presentation for a student who is hearing impaired). Classes
enrolled students with mobility impairments may have to be rescheduled in accessible facilities.
The college or university may need to provide special services such as registration, note-taking, or
mobility assistance.

It is the student’s responsibility to notify his or her professors of the need for such an
accommodation. Disability Services provides students with letters to present to faculty members
to verify that the student has a disability and needs accommodations. Individuals requiring special
accommodation should contact the professor after class or during office hours.

Religious Holy Days

The University of Texas at Dallas will excuse a student from class or other required activities for
the travel to and observance of a religious holy day for a religion whose places of worship are
exempt from property tax under Section 11.20, Tax Code, Texas Code Annotated.

The student is encouraged to notify the instructor or activity sponsor as soon as possible regarding
the absence, preferably in advance of the assignment. The student, so excused, will be allowed to
take the exam or complete the assignment within a reasonable time after the absence: a period
equal to the length of the absence, up to a maximum of one week. A student who notifies the
instructor and completes any missed exam or assignment may not be penalized for the absence. A
student who fails to complete the exam or assignment within the prescribed period may receive a
failing grade for that exam or assignment.

If a student or an instructor disagrees about the nature of the absence [i.e., for the purpose of
observing a religious holy day] or if there is similar disagreement about whether the student has
been given a reasonable time to complete any missed assignments or examinations, either the
student or the instructor may request a ruling from the chief executive officer of the institution, or
his or her designee. The chief executive officer or designee must take into account the legislative
intent of TEC 51.911(b), and the student and instructor will abide by the decision of the chief
executive officer or designee.

These descriptions and timelines are subject to change at the discretion of the Professor.

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 Homework 1

NAME: ___________________________

Q1. The AMA has lunch meetings the first Friday of every month
‰ Fixed overhead costs: $500
‰ Speaker expenses: $1000 Variable costs: $10
‰ Attendance price: p=$40 Seats: 100
The president would like to increase the profit from these meetings. The normal attendance is
about 50.

She does not believe simply increasing the price can solve the problem. Two proposals are being
considered:
‰ A student discount, p=$12, expected 20 extra tickets from student segment.
‰ A repeat performance on the first Saturday of every month with the same
speaker. Additional overhead = 0, speaker expense $100, p=$30, expected 40
tickets on Saturday but only 15 are new (25 switched from Friday to Saturday).

Make a recommendation on these proposals.

Q2. To the publisher it costs $10 to publish a book, and thereafter a margin of 10 dollars is added
to obtain the price at which the book is sold to the wholesaler. The wholesaler sets the wholesale
price to get a 40% margin on its cost. The retailer adds a 50% margin on its cost to obtain the
retail price. What is the retail price?

Homework 2

NAME: ___________________________

Q1. Below is a set of prices and sales volume (thousands of units) for a monopolist software
provider in five test markets. This is preliminary to the National launch. The marginal cost is $1
per unit.

Price($) Sales(Units*1000)
100 20
120 15
130 12
140 10
150 9
Assume that the data describes a robust, linear underlying relationship between sales and price.
What recommendation would you make to management regarding a national launch ? State and
defend any necessary assumptions made.
(Hint: Enter the data into a spreadsheet. Run a regression to find the underlying demand curve.
Then use calculus to find the optimal price)

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Q2. Assume that you did not have the test market data but you did have access to five market
pundits. What questions would you ask them to (a) obtain the demand curve, and (b) obtain the
optimal price? (Hint: consider the decision calculus approach)

Q3. Assume the same situation as in Q1, but this time there are two segments of consumers,
students and non-students. The data is
Non-student price Non-student sales Student price student sales
$100 20,000 $100 400
$120 15,000 $120 200
$130 12,000 $80 500
$140 10,000 $150 100
$150 9,000 $50 1000
What is the optimal pricing policy ? Does the firm need to ask students to show their ID ?

Q4. Why do sticker prices often end in the digit 9 ?

Q5. What is the purpose of the MSRP listed on many products ?

Q6. A monopolist charges price p for its product, whose marginal cost is c. Should the optimal
price increase, decrease or remain the same if
(a) The firm was more efficient in production and had a lower marginal cost?
(b) The firm has lost an IP suit for patent infringement an must pay a fine of $100m to the
patent holder?
(c) A competitor enters the market?
(d) Consumers are willing to pay less because the economy takes a downturn? (Hint:
Consider two cases, one where the demand curve shifts down in a parallel manner, and
the other where it shifts down unequally becoming steeper).
(e) The government enforces a 10% tax on every transaction?

Homework 3

NAME: ___________________________

Q1. Consider the game below. Which of the following statements is false ?

Firm B

Price High Price Low

Price
Firm A (30, 30) (2, 50)
High

Price
(50, 2) (5, 5)
Low

a. This game is known as a prisoners’ dilemma.

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 b. Firm B does better to price low if firm A prices high.
c. Firm A’s Nash equilibrium strategy is to price low.
d. The Nash equilibrium provides the solution to the game.
e. Firm A does best to price high regardless of firm B’s action.

Q2. In order to deal with competitive price cutting, some firms offer to match their competitors’
price (similarly, offer to accept competitor’s coupons). What do you think would be the impact of
these price-matching guarantees on profits and on prices in the industry?

Q3. Speculate on the impact of the internet on competitive pricing decisions. Under what
circumstances would internet prices be lower or higher than offline prices? Would it be easier to
collude, or would price wars be more likely? If two brick-and-mortar stores each establish an
online presence, what impact would it have on their online and offline prices? (Rao et al. 2000
have a brief discussion on this topic)

Q4. Consider a local software industry where two firms A and B start at prices of $100 per hour
of consultants’ service and there are about 50000 customer-hours in a year. Variable costs are
about $10 per hour. Customers choose on the basis of price. The new pricing manager of firm A
figures that her company should be the low price firm. She therefore sets the formula for the
company’s price to be $5 below the competition (as long as it is profitable to do so). The manager
of firm B responds by making the assertion that his firm will match the competitor’s price.
Tabulate the price reactions for several periods and find out what the equilibrium prices should
be.

Q5. Consider the following demand functions for two firms 1 and 2:
D1 = a – b P1 +e P2
D2 = a – b P2 + e P1
Where D denotes the demand and P the price, and a, b, e are constants. Assume that the marginal
cost is zero. Find (a) the reaction functions for the two firms and (b) the equilibrium prices.
(Hint – If it is difficult to do this by calculus, use Excel. Choose particular numerical values of a,
b, and e. Then create the reaction function tables. Finally, try to read off the closest
approximation to the equilibrium price as discussed in class.)

Q6. (a) What are two implications for pricing in a market where there are price tiers (see book).
(b) What would the table of elasticities and cross-elasticities look like in a market where there are
distinct price tiers (i) when price changes affect only other brands in the same tier, (b) when price
changes affect brands in the same and lower tiers.

Homework 4

NAME: ___________________________

For this homework, please do the case analysis for the HBS case “American Airlines Value
Pricing (A)”

This case is part of your case packet, available from off-campus books. The case is not a clear
decision problem but it does ask for an evaluation of a decision that has been proposed by a
company. Please provide an evaluation and defend it well.

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Please do not exceed 5 double spaced pages, 12 pt font, not including an appendix if necessary.
Tables and figures may be put into the appendix. It is entirely possible that an appendix may not
be needed at all. You do not need to search for any facts outside of what the case contains.

Homework 5

NAME: ___________________________

For this homework, please do the case analysis for the HBS case “Cambridge Software
Corporation”

This case is part of your case packet, available from off-campus books. The case has a clear cut
decision problem. Please provide a decision and defend it well.

You have probably analyzed cases in the past. There is no correct answer but there are incorrect,
poorly defended and inarticulate answers. To see a possible case outline, please refer to my
Marketing Management syllabus on my website. This is a suggested outline only. Please do not
provide possibly unrelated analysis such as a SWOT table. As a further guideline, please do not
exceed 5 double spaced, 12 pt font, pages, excluding the appendix. Tables and figures may be put
into the appendix. It is entirely possible that an appendix may not be needed at all. The article by
Shapiro and Varian on versioning may be useful reading. Please cite it and also other source used.
However, you do not need to search for any facts outside of what the case contains.

Please see the separate link 'Hints on the Cambridge Software case' on the class webpage for hints
about this case.

Homework 6

NAME: ___________________________

Q1. Distinguish between pure bundling, pure components and mixed bundling, providing
examples of each. List three separate explanations for why firms might sell bundles of their
products. Then, with a numerical example, discuss in detail the demand side explanation for
bundling based on the negative correlation of willingness-to-pay for the different components by
different segments of consumers.

Q2. Consider a pizza store that sells to three equal sized segments of consumers, labeled A, B and
C. The customers have a decreasing utility for every additional pizza purchased on a given
purchase occasion. Specifically, their willingness-to-pay for the first, second, third and fourth
pizzas are shown in the table below. (We assume only one type of pizza, in terms of size, crust
and toppings to keep things simple).

No. of pizzas Segment A Segment B Segment C

First $9.00 $12.00 $15.00
Second $6.00 $9.00 $10.00

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 Third $3.00 $5.50 $6.50
Fourth $0.50 $1.50 $2.00

The marginal cost of a pizza is $1.00. Determine the optimal non-linear and uniform pricing
schedules. (Be sure to show intermediate steps, not just the final answer). How would you
implement the nonlinear pricing schedule?

Q3. Using cellular phone contracts as an example, explain what “two part tariff” means
and what a “menu of two part tariffs” means. Using pricing at entertainment parks as an
example, show numerically that a two part tariff can be much more profitable than
charging a single price.

Q4. Illustrate the benefits of price customization. Show, using a simple demand function,
how the ability to charge two prices instead of one, for different customer segments, can
dramatically increase profits for the firm. What are the fairness and legality concerns?

Course Syllabus Page 11