All business faces a similar question: What price for their product will generate the maximum profit? The answer. is not always obvious: Raising the price of something often has the effect of reducing sales as price sensitive consumers seek alternatives or simply do without. For every product, the extent of that sensitivity is different. The trick is to find the point for each where the ideal. tradeoff between profit margin and sales volume is achieved. Right now, the developers of a new private toll road between Leesburg and Washington Dulles. International Airport are trying to discern the magic point. The group originally projected that it could charge nearly $2 for the 14-mile one-way trip, while attracting 34,000 trips on an average day from overcrowded public roads such as nearby Rout 7. But. after spending $350 million to build their much heralded "Greenway", they discovered to their dismay that only about a third that number of commuters were willing to pay that much to shave 20 minutes off their daily commute...It was only when the company, in desperation, lowered the toll to $1 that it came quite. close to attracting the expected traffic flows. Clifford Winston of the Brookings Institution and John Calfee of the American Enterprise Institute have considered the toll road's dilemma...Last year, the economists conducted an elaborate market test with 1.170 people across the country who were each presented with a series of options in which they were, in effect, asked to make a personal tradeoff between less commuting time and higher tolls. In the end, they concluded that the people who placed the highest value on reducing their commuting time already had done so by finding public transportation, living closer to their work, or selecting jobs that allowed them to commute at off-peak hours. Conversely, those who commuted significant distances had a higher tolerance for traffic congestion and were willing to pay only 20 percent of their hourly pay to save an hour of their time. Overall, the Winston/Calfee findings help explain why the Greenway's original toll and volume projections were too high: By their reckoning, only commuters who earned at least $30 an hour (about $60,000 a year) would be willing to pay $2 to save 20 minutes. Suppose, indeed, that the demand for using the private road comes from two types of consumers: those for whom time is very precious and are willing to pay a lot for using the (private) road and saving some time, and those who do not mind to spend a little bit more time in the car and, hence, their demand. for using the (private) road is very elastic. Can your suggest a pricing strategy that will enable the firm to " identify the different drivers and charge them different prices, so that profits will be higher?
All business faces a similar question: What price for their product will generate the maximum profit? The answer. is not always obvious: Raising the price of something often has the effect of reducing sales as price sensitive consumers seek alternatives or simply do without. For every product, the extent of that sensitivity is different. The trick is to find the point for each where the ideal. tradeoff between profit margin and sales volume is achieved. Right now, the developers of a new private toll road between Leesburg and Washington Dulles. International Airport are trying to discern the magic point. The group originally projected that it could charge nearly $2 for the 14-mile one-way trip, while attracting 34,000 trips on an average day from overcrowded public roads such as nearby Rout 7. But. after spending $350 million to build their much heralded "Greenway", they discovered to their dismay that only about a third that number of commuters were willing to pay that much to shave 20 minutes off their daily commute...It was only when the company, in desperation, lowered the toll to $1 that it came quite. close to attracting the expected traffic flows. Clifford Winston of the Brookings Institution and John Calfee of the American Enterprise Institute have considered the toll road's dilemma...Last year, the economists conducted an elaborate market test with 1.170 people across the country who were each presented with a series of options in which they were, in effect, asked to make a personal tradeoff between less commuting time and higher tolls. In the end, they concluded that the people who placed the highest value on reducing their commuting time already had done so by finding public transportation, living closer to their work, or selecting jobs that allowed them to commute at off-peak hours. Conversely, those who commuted significant distances had a higher tolerance for traffic congestion and were willing to pay only 20 percent of their hourly pay to save an hour of their time. Overall, the Winston/Calfee findings help explain why the Greenway's original toll and volume projections were too high: By their reckoning, only commuters who earned at least $30 an hour (about $60,000 a year) would be willing to pay $2 to save 20 minutes. Suppose, indeed, that the demand for using the private road comes from two types of consumers: those for whom time is very precious and are willing to pay a lot for using the (private) road and saving some time, and those who do not mind to spend a little bit more time in the car and, hence, their demand. for using the (private) road is very elastic. Can your suggest a pricing strategy that will enable the firm to " identify the different drivers and charge them different prices, so that profits will be higher?
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
Problem 1CE
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