Strategies for Enhancing Profitability
Overview
Dynamic pricing is a collection of pricing strategies used by firms and organization to enhance profits. You will begin by exploring pricing techniques that operate in the market in real time. Then you will explore how auctions are employed in the search to find the value of goods and services.
Consult the following video before getting started:
Instructions
In 5–7 pages…
- Compare and contrast surge versus congestion pricing. Provide a specific example of each currently in use.
- There are many types of auctions, each with strengths and weakness at uncovering the real price/value of an item. Compare and contrast how each of the following uncovers value and provide a specific example of how each uncovers value:
- The English auction and the Dutch auction.
- The sealed-bid first-price auction and the Vickery Auction.
- Auctions are widely used. Analyze an actual auction employed by each of the following:
- A state or federal government or an agency of a state or federal government.
- A for-profit business.
- For each, explain what type of auction is employed and how the auction solves the problem of finding the best price for the good or service.
- Read the Letter from Senator Warren to Fed on Wells Fargo FHC Status [PDF].
- Explain how an auction to sell the Wells Fargo consumer-facing banking division might be used to determine the value of the division.
- Include a recommendation on what type of auction might be used.
- Propose ways in which a company can use dynamic pricing to better uncover value and increase revenue.
- Surge pricing vs. Congestion pricing
Surge pricing and congestion pricing are both pricing strategies used to manage demand for a particular product or service. However, they differ in their objectives and the type of product or service they are applied to.
Surge pricing is a pricing strategy where prices are increased during periods of high demand to encourage consumers to reduce their consumption of the product or service. Surge pricing is commonly used in transportation services, such as ride-sharing services, where prices are increased during peak demand periods, such as rush hour or major events.
An example of surge pricing is Uber’s surge pricing, where the cost of a ride increases during high demand periods, such as during a major event or during rush hour. This pricing strategy helps to incentivize consumers to reduce their demand for rides during peak periods and helps to ensure a more even distribution of demand throughout the day.
Congestion pricing, on the other hand, is a pricing strategy where the price of a good or service is increased during periods of high demand to manage congestion and encourage consumers to shift their demand to less congested periods. Congestion pricing is commonly used in transportation services, such as toll roads and bridges, where prices are increased during peak periods to reduce traffic congestion.
An example of congestion pricing is the London Congestion Charge, where drivers are charged a fee for driving in the central area of London during peak periods. This pricing strategy helps to manage traffic congestion and encourage drivers to shift their trips to less congested periods.
- English auction vs. Dutch auction
The English auction and Dutch auction are both auction formats used to sell goods to the highest bidder. However, they differ in their bidding rules and the role of the auctioneer.
In an English auction, the auctioneer starts the bidding at a low price and progressively increases the price until no further bids are received. The bidder with the highest bid at the end of the auction wins the item.
An example of an English auction is an auction of artwork at Sotheby’s or Christie’s. The auctioneer starts the bidding at a low price and progressively increases the price until the highest bidder is determined.
In a Dutch auction, the auctioneer starts the bidding at a high price and progressively decreases the price until a bidder agrees to purchase the item at the current price. The first bidder to accept the current price wins the item.
An example of a Dutch auction is the auction of flowers at the Aalsmeer flower auction in the Netherlands. The auctioneer starts the bidding at a high price and progressively decreases the price until a bidder agrees to purchase the flowers at the current price.
- Sealed-bid first-price auction vs. Vickery auction
The sealed-bid first-price auction and Vickery auction are both auction formats used to sell goods to the highest bidder. However, they differ in their bidding rules and the winner determination process.
In a sealed-bid first-price auction, bidders submit their bids in a sealed envelope, and the highest bidder wins the item and pays the amount they bid.
An example of a sealed-bid first-price auction is an auction of government bonds where potential buyers submit sealed bids with the amount they are willing to pay for the bonds.
In a Vickery auction, bidders submit their bids in a sealed envelope, and the highest bidder wins the item but pays the amount of the second-highest bid. The Vickery auction incentivizes bidders to bid their true value for the item and can result in a higher price than in a sealed-bid first-price auction.
An example of a Vickery auction is the sale of radio spectrum licenses by the Federal Communications Commission (FCC) in the United States.
- Auctions employed by government and for-profit businesses
Government agencies and for-profit businesses use auctions to sell goods and services in a competitive
