MIT SLOAN SCHOOL OF MANAGEMENT
15.035: PRICING STRATEGY
Course meets Monday and Wednesday, 1:00-2:30, in room E51-376.
Professor Richard
Schmalensee (E52-456, x3-2957)
Email: rschmal@sloan.mit.edu
TA: David Reiley (E56-345,
x3-7353)
Email: reiley@mit.edu
Office Hours: Wednesday 3-5pm, or by appointment.
No matter how innovative, useful, or high-quality a firm's products are,
its profitability can depend critically on how those products are priced.
Pricing decisions are often as difficult as they are important, and actual
pricing policies are sometimes quite complex. This subject will introduce
you to some of the key concepts and strategic alternatives that are relevant
for pricing decisions and will give you an analytical foundation for designing
profitable pricing policies in practice.
All students should have had 15.010 or an equivalent course in microeconomics
and should be comfortable with analytical material. The following text should
be purchased, along with a package of cases and readings from Graphic Arts:
Thomas T. Nagle and Reed K. Holden, The Strategy and Tactics of Pricing,
2nd Ed., Englewood Cliffs: Prentice-Hall, 1995. (referred to below as "N
& H")
Grading will be based on midterm (30%) and final (30%) exams, both of which
will be in class, on a set of short written assignments (15%), and on class
participation (25%). Students are expected to come to class prepared to
defend specific recommendations when cases are assigned. (Please run the
numbers!) Students are also expected to have read carefully the assignments
in N & H and the other readings indicated by the word Discuss.
For a list of discussion questions to guide your
preparation for the classroom discussion, click here.
The remaining items on the list below will generally be handled in a lecture
format, with technical details usually glossed over. (The list's length
reflects a desire to provide potentially useful background, not sadism.)
Written assignments should be short memoranda (two pages at most); no credit
will be given for late assignments.
1. Introduction (February 7)
- N & H, chapter 1.
- H. Simon, "Pricing Opportunities -- And How to Exploit Them,"
Sloan Management Review, Winter 1992.
2. Fundamental Factors: Cost (February 12)
- Discuss: Computron, Inc., 1978 [579-031].
- N & H, chapters 2 & 3.
3. Fundamental Factors: Value (February 14)
- Discuss: Optical Distortion, Inc. (A) [575-072].
- N & H, pp. 72-77 and 107-114.
4. Fundamental Factors: Competition (February 20)
- Discuss: Federated Industries (A) [9-585-104].
- R.S. Pindyck and D.L. Rubinfeld, Microeconomics, 3rd Ed.,
Englewood Cliffs, NJ: Prentice-Hall, 1994, chapter 13, "Game Theory
and Competitive Strategy." (Review)
- N & H, chapter 5; pp. 141-152 and chapter 11 are recommended.
5. Fundamental Factors: Legal Constraints (February 21)
- Discuss: Sedek Industries (A) [9-584-132], materials
to be distributed in class.
- N & H, chapter 14.
6. Rigor v. Relevance? (February 26)
- T.V. Bonoma, V.L. Crittenden, and R.F. Dolan, "Can We Have Rigor
and Relevance in Pricing Research?" in T.F. Divinney, ed., Issues
in Pricing, Lexington: Heath, 1988. (This volume is referred
to as "Divinney" below.)
Discuss: V. Govindarajan and R.N. Anthony, "How
Firms Use Cost Data in Price Decisions," Management Accounting,
July 1983.
- Discuss: B. Fog, Pricing in Theory and Practice,
Copenhagen: Munksgaard, 1994, chapter 8.
7. Cost and Demand Dynamics I (February 28)
- Discuss: Cumberland Metal Industries: Engineered Products
Division, 1980 [580-104].
- N & H, pp. 152-161 and chapter 7.
- R. Schmalensee, "A Note on Pricing Dynamics," MIT Sloan School.
8. Cost and Demand Dynamics II (March 4)
- S. Kalish, "Pricing New Products from Birth to Decline: An Expository
Review," in Devinney.
- S. Kalish, "A New Product Adoption Model with Price, Advertising,
and Uncertainty," Management Science, December 1985. (Skim:
for Kalish Pricing Problem only)
Discuss: R.H. Coase, "Durability and Monopoly,"
Journal of Law and Economics, April 1972.
9. Negotiation (March 6)
- HAND IN: Kalish pricing problem.
- Discuss: Charlestown Chemical, Inc. [9-590-024].
- N & H, pp. 189-199.
- M.V. Marn and R.L. Rosiello, "Managing Price, Gaining Profit,"
Harvard Business Review, September-October 1992 [92507].
10. Bidding (March 11)
- N & H, pp. 199-206.
- R.H. Thaler, "The Winner's Curse," Journal of Economic
Perspectives, Winter 1988.
- R. Wilson, "Introductory Note: Trading Procedures," Stanford
Business School, pp. 1-22.
- HAND IN: By 5:00pm, submit electronic
answer sheet for the Maxco/Gambit bidding problem.
11. Determinants of Price Sensitivity (March 13)
- N & H, pp. 77-104 and chapter 12.
- Discuss: G. Kalyanaram and R.S. Winer, "Empirical
Generalizations from Reference Price Research," Marketing Science,
1995.
12. IN-CLASS MID-SEMESTER EXAMINATION (March 18)
13. Assessing Demand Conditions (April 1)
- Discuss: American Repertory Theater [9-580-133].
- N & H, chapter 13.
- S.J. Hoch, B-D. Kim, A.L. Montgomery, and P.E. Rossi, "Determinants
of Store-Level Price Elasticity," Journal of Marketing Research,
February 1995. (Illustrates the use of scanner data; ignore the technical
details.)
14. Segmentation and Discrimination (April 3)
- Discuss: Polyfiber Industries, Inc. [9-513-144].
- N & H, pp. 161-165, 210-215, and 230-231.
- A.A. Stern, "The Strategic Value of Price Structure," Journal
of Business Strategy, Fall 1986.
- G. Assmus and C. Wiese, "How to Address the Gray Market Threat
Using Price Coordination," Sloan Management Review, Spring
1995.
15. Couponing and Dealing (April 8)
- N & H, pp. 249-257.
- R.C. Blattberg, R. Briesch, and E.J. Fox, "How Promotions Work,"
Marketing Science, 1995.
- Discuss: C. Narasimhan, "A Price Discrimination
Theory of Coupons," Marketing Science, Spring 1984. (Skim
the math; focus on the story and the empirics.)
16. Airlines' Yield Management (April 10)
- Discuss: American Airlines, Inc.: Revenue Management
[9-190-029].
- N & H, pp. 215-218.
- E. Schmitt, "The Art of Devising Air Fares," New York
Times, March 4, 1987.
- Barry C. Smith, John F. Leimkuhler, and Ross M. Darrow, "Yield
Management at American Airlines," Interfaces, January-February
1992.
17. Everyday Low Prices (April 17)
- HAND IN: Constitution Airline pricing problem.
- Discuss(briefly): P&G and Everyday Low Prices [9-593-108]
- R.D. Buzzell, J.A. Quelch, and W.J. Salmon, "The Costly Bargain
of Trade Promotion," Harvard Business Review, March-April
1990.
- Discuss: American Airlines' Value Pricing (A) [9-594-001],
to be handed out in class.
18. Nonlinear Pricing (April 22)
- N & H, pp. 228-230 and 218-223.
- Review: W.Y. Oi, "A Disneyland Dilemma: Two-Part Tariffs for a
Mickey Mouse Monopoly," Quarterly Journal of Economics,
1971.
- R. Dolan, "Quantity Discounts: Managerial Issues and Research Opportunities,"
Marketing Science, Winter 1987.
- R. Wilson, Nonlinear Pricing, New York: Oxford, 1993, pp.
73-88.
- R.Schmalensee, "A Note on Nonlinear Pricing," MIT Sloan School.
19. Pricing Multiple Products (April 24)
- Discuss: Loctite Corporation: Industrial Products Group [581-066].
- N & H, pp. 235-241.
20. Bundling (April 29)
- HAND IN: Nonlinear Pricing Exercise.
- N & H, pp. 225-228.
- R. Wilson, "Economic Theories of Price Discrimination and Product
Differentiation: A Survey, Part II," Mimeo, Stanford, July 1991, pp.
1-7.
- G.D. Eppen, W.A. Hansen, and R.K. Martin, "Bundling - New Products,
New Markets, Low Risk," Sloan Management Review, Summer
1991.
21. Segmentation by Product Line Design (May 1)
- Discuss: Cambridge Software Corporation [9-191-072].
- N & H, pp. 223-225.
- R. Schmalensee, "A Note on Product Line Design and Self-Selection,"
MIT Sloan School.
22. Pricing and Promotion (May 6)
- HAND IN: New Hawaii flight design
problem.
- Discuss: Raymond Mushroom Corporation [9-584-093]
- N & H, pp. 241-249.
- A. Kaul and D.R. Wittink, "Empirical Generalizations About the
Impact of Advertising on Price Sensitivity and Price," Marketing
Science, 1995.
23. Pricing in the Distribution Channel (May 8)
- Discuss: Hartman Luggage Company: Price Promotion Policy
[581-068].
- N & H, pp. 257-265.
- D.W. Carlton and J.M. Perloff, Modern Industrial Organization,
2nd Ed., New York: HarperCollins, 1994, pp. 522-540.
- E. Gerstner and J.D. Hess, "Who Benefits From Large Rebates: Manufacturer,
Retailer, or Consumer?" Economics Letters, 1991.
24. Pricing at Retail (May 13)
- Discuss: Randall's Department Stores [9-593-032]
- N & H, pp. 240-241.
- B.P. Pashigian, "Demand Uncertainty and Sales: A study of Fashion
and Markdown Pricing," American Economic Review, December
1988.
- F.J. Mulhern and R.P. Leone, "Implicit Price Bundling of Retail
Products: A Multiproduct Approach to Maximizing Store Profitability,"
Journal of Marketing, October 1991.
25. IN-CLASS FINAL EXAMINATION (May 15)