Midterm project (price elasticity estimation) report due on Wednesday, April 30.
Final project (price elasticity and optimization) report due on Tuesday, May 27.
Please refer to the detailed project assignment included in the course packet.
Materials
Required Text:
Nagle, Thomas T. & Hogan, John E. (2006), The Strategy and Tactics of Pricing: A Guide to Growing More Profitably, Fourth Edition, Prentice-Hall, Upper Saddle River, NJ.
In addition to the text, the course packet includes a number of articles, cases, teaching notes, and homework assignments that will be used throughout the course.
Supplementary Texts:
Monroe, Kent B. (2003), Pricing: Making Profitable Decisions, Third Edition, McGraw Hill, Boston: MA.
Dolan, Robert J. and Hermann Simon (1996), Power Pricing: How Managing Price Transforms the Bottom Line, Free Press, New York: NY.
Wilson, Robert (1993), Nonlinear Pricing, Oxford University Press, New York: NY.
Engelson, Morris (1995), Pricing Strategy: An Interdisciplinary Approach, Joint Management Strategy, Portland, OR.
Simon, Hermann (1989), Price Management, Elsevier Science Publishers, Amsterdam: Netherlands.
Tuck Honor Code
You should work through the cases and homeworks individually in order to build your understanding and confidence in handling the material. Also, please note that it is a violation of the honor code to use any course materials such as homework assignments, exams, etc. from previous years, unless I provide them to you myself.
Attendance and on-time arrival at all class sessions is expected and you are responsible for knowing what transpired in every class. Except in an unforeseen emergency, please inform the instructor beforehand if you need to miss a class. There will be a grade penalty above and beyond the impact on class participation for more than one absence.
Grading
Your final grade will be determined as follows:
Homework 30%
Midterm Project Report 30%
Final Project Report 30%
Class Participation 10%
Schedule
Session 1 (Wed. Mar. 26):
Introduction & a Basic Approach to Pricing New Products
Topic 1: Course Introduction
Topic 2: Project Introduction
Case: Adios Junk Mail, Darden Business Publishing, #UVA-M-0553
Class Prep 1: Text, Ch. 1: Tactical Pricing, pages 1-13
Class Prep 2: Case questions and Adios Junk Mail: Assignment and Case Preparation Note, Tuck School of Business
Case Questions:
Use the data in the case (available as an Excel spreadsheet file in the course folder) to estimate the percentage of customers who will purchase the junk mail reduction service at various price points (e.g., from $5 up $100).
Based on your above analysis and any other relevant factors, recommend the price that Adios Junk Mail should charge.
How else might Collins determine the price sensitivity of target customers?
Session 2 (Thurs. Mar. 27):
Basic Pricing Theory
Topic 1: Cost-Plus Pricing
Topic 2: Classical Approach and Relevant Costs
Topic 3: Iso-Profit Analysis
Class Prep 1: Text, Ch. 8: Costs, pages 149-167
Class Prep 2: Text, Ch. 9: Financial Analysis, 175-212
Session 3 (Wed. Apr. 2):
Estimation – Basic Demand Models
Topic 1: SPSS Review
Topic 2: Log-Log Estimation
Class Prep 1: SPSS Handout
Class Prep 2: Using Regression to Model Non-Linear Relationships Handout
Class Prep 3: Project Assignment Guide
Class Prep 4: Note on Benchmarking an Estimated Demand Function
Session 4 (Thurs. Apr. 3):
Pricing Theory and Estimation
Topic 1: New Products: Economic Value to Customers
Topic 2: Price Elasticity and Estimation
Class Prep 1: Text, Ch. 3: Value Creation, pages 27-52
Class Prep 2: Teaching Note on Elasticity and Regression Analysis
Session 5 (Wed. Apr. 9):
Application—Price Elasticity
Topic 1: Case - Philip Morris: Marlboro Friday (A), HBS Case # 9-596-001
Topic 2: Introduction to Price Optimization
Class Prep 1: Marlboro Case Preparation Guide
Homework 1: Case Q1, Q2
Case Questions (Q1, Q2 to be handed in):
What percent change in volume is required to maintain its level of profit if Philip Morris cut the price of Marlboro cigarettes by 20%? To make matters simple, assume (i) no change in trade margin percent and (ii) percent variable costs are as indicated in Revised Table A. What price elasticity is required to achieve such a change in volume?
Using the data contained in Exhibit 3 of the case, estimate the price elasticity of demand for cigarettes using the constant elasticity, log-log model. Also, please use real retail prices, i.e., adjusted for inflation using 1982 as the base year, in determining elasticity.
In your course pack is a list of more detailed questions—see Marlboro case preparation guide.
Session 6 (Thurs. Apr. 10):
Pricing Theory—Impact of Competition
Topic 2: Estimating Competitive Effects
Topic 3: Nash Equilibrium Prices
Class Prep 1: Text, Ch. 10: Competition, pages 213-238
Class Prep 2: Farris, Paul and Quelch, John, “In Defense of Price Promotion,” Sloan Management Review, Fall 1987, 29 (1), 63-69
Class Prep 3: Rao, Akshay, Bergen, Mark and Davis, Scott, “How to Fight Price Wars,” Harvard Business Review, March-April 2000, 107-116
Session 7 (Wed. Apr. 16):
Pricing Theory—Channel Interaction
Topic: Manufacturer/Retailer Interaction and Pricing Implications
Class Prep: None! Work on your project!
Homework 2: Experience effects; Reference price effects
Session 8 (Thurs. April 17):
Estimation—The Logit Model, Reference Effects
Topic 1: Logit model for demand optimization
Topic 2: Price Psychology
Topic 3: Estimating Reference Price Effects
Topic 4: Project Q&A
Class Prep 1: Anderson, Eric and Simester, Duncan, “Mind Your Pricing Cues,” Harvard Business Review, September 2003
Class Prep 2: Text, Ch. 7: Price Level, pages 124-145
Session 9 (Wed. Apr. 23):
Pricing Theory—Dynamic Pricing
Topic 1: Dynamic Programming
Topic 2: Backward Induction
Class Prep: Note on “Solving Dynamic Reference Pricing Problem Using Principle of Backward Induction,” Tuck School of Business
Homework 3: Cereal Promotions
Session 10 (Thurs. Apr. 24):
Pricing Theory—Competition and Dynamic Pricing
Topic 1: Value Pricing
Topic 2: Predicting Competitive Response
Class Prep 1: Value Pricing at Procter and Gamble (A), Stanford University Case distributed by HBS publishing, Product # M-284A
Value Pricing at Procter and Gamble (B), Stanford University Case distributed by HBS publishing, Product # M-284B
Class Prep 2: Ailawadi, Kusum, Kopalle, Praveen and Neslin, Scott (2005), “Predicting Competitive Response to a Major Policy Change: Combining Game Theoretic and Empirical Analyses,” Marketing Science, 24 (1), 12-24
Session 11 (Wed. April 30):
Pricing Theory—New Products
Topic 1: Conjoint Analysis for Pricing New Products
Class Prep 1: Text, Ch. 5: Price and Value Communication, pages 81-101
Class Prep 2: Leszinski, Ralf and Marn, Michael, “Setting Value, Not Price,” Mckinsey Quarterly, 1997, No. 1, 98-115
Mid-Term Project Report Due
Session 12 (Thurs. May 1):
Application—Elasticity Estimation & Price Optimization
Guest Speaker: Ken Ouimet, Ph.D., Board Member, Revionics; Founder, KhiMetrics; Chief Scientific Officer, SAP International (’04-’08)
Topic: Price Optimization in Practice
Class Prep 1: Text, Ch. 13: Price and Value Measurement, pages 281-316
Class Prep 2: Farris, Paul and Quelch, John, “In Defense of Price Promotion,” Sloan Management Review, Fall 1987, 29 (1), 63-69
Homework 4: Backward Induction and Seasonality
Session 13 (Wed. May 7):
Application—Price Optimization in Practice
Guest Speaker: John Crowther, T’95, V.P., Product Management, DemandTec
Topic: Price Optimization at DemandTec
Class Prep 1: Text, Ch. 10: Competition, pages 213-238
Class Prep 2: Rao, Akshay, Bergen, Mark and Davis, Scott, “How to Fight Price Wars,” Harvard Business Review, March-April 2000, 107-116
Session 14 (Thurs. May 8):
Pricing Theory—Price Discrimination
Topic 1: Price Customization
Topic 2: Price Bundling
Topic 3: Yield Management
Class Prep 1: Text, Ch. 4: Price Structure, pages 54-79
Class Prep 2: Text, Ch. 14: pages 330-335
Class Prep 3: Eppen, Gary, Hanson, Ward and Martin, Kipp (1999) “Bundling - New Products, New Markets, Low Risk,” Sloan Management Review, Summer, 32 (4) 7-14”
Class Prep 4: Netessine, Serguei and Shumsky, Robert (2002), “Introduction to the Theory and Practice of Yield Management,” INFORMS Transactions on Education, 3 (1) 34-44
Session 15 (Wed. May 14):
Application—Pricing Services
Class Prep:Case: Hanover Inn, Tuck School of Business at Dartmouth
Homework 5: Hanover Inn Question 1 (first part) and Question 4
Case Questions:
What is your estimate of the marginal cost of a night’s room at the Hanover Inn? Should the Inn be willing to offer rooms at this rate? If so, when and to whom? If not, why not?
Assuming the 1992 survey data still holds, what is your estimate of the Inn’s market share of prospective students during a year?
What is your opinion of the FY1992 ADRs for each market segment? Are they too low or too high? Why?
Estimate the price elasticities for each market segment for July 1991. What do the elasticities imply about the rate that should be set for each segment?
Should the Inn continue with its current practice of leaving price quotes to the discretion of hotel telephone operators, or should it consider a formalized rate structure for different types of guests?
On Thursday, October 14, 2007, the Inn has only eight standard rooms still available for the following Thursday, October 21, 2007. Should it accept any reservations at $190? At $200? At $210? Why? Suggest some changes to the way in which the Inn prices its rooms and takes reservations.
Guest: Carl Pratt, General Manager, Hanover Inn
Session 16 (Thurs. May 15):
Application—Markdown Pricing and Promotions
Guest Speaker: Rama Ramakrishnan, Ph.D., Chief Scientific Officer,
Oracle Corporation
Topic: Markdown Price Optimization
Class Prep: Friend, Scott and Walker, Patricia (2001), “Welcome to the New World of Merchandising,” Harvard Business Review, November, 133-141
Homework 6: Price Discrimination
Session 17 (Wed. May 21):
Application—Pricing Practice at Consumer Packaged Goods
Guest: Jim Figura, Senior V. P. Colgate-Palmolive
Topic: Pricing at Colgate
Class Prep: “Emerging Trends in Retail Pricing Practice”
Session 18 (Thurs. May 22):
Putting It All Together
Topic: Course Wrap-up
Class Prep 1: Davenport, Thomas (2006) “Competing on Analytics,” Harvard Business Review, January
Class Prep 2: Fleischmann, Hall, & Pyke (2004), “Smart Pricing,” Sloan Management Review, 45 (2) 9-13
Class Prep 3: Pyke, David and Johnson, Eric (2004), “Real Time Profit Optimization,” ASCET 6 (June), 98-102
Project: Final Project Report Due Tuesday, May 27
Final Project - Tues. May 27th
Final price optimization project report due on Tuesday, May 27
Please remember to delete the confidential orange juice data file from your respective computers.
