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Pricing Behavior

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Research the tiered pricing behavior of pharmaceutical and airline firms and address the following:

1. Give examples of how each industry practices price discrimination.

2. What are the short and long term strategic reasons these industries employ
tiered pricing?

3. What impact does price discrimination have on the profitability of these
industries?

4. Specifically, explain and give an example the airline industry "yield
management" systems.

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Step 1
The pharmaceutical industry practices price discrimination by charging customers living in wealthier countries a higher price for medicine than what they charge for the same medicine in poorer countries. For example, the price of antibiotics sold by companies in the US is much higher than the prices charged by the same companies for the same antibiotics in African countries.
The airlines industry charges different prices at different points in time for the same ticket. If there are few unsold tickets and the plane is likely to be full, the prices of tickets are increased. On the other hand if the tickets are likely to remain unsold, the prices are lowered in such a way that all/more tickets are sold.

Step 2
The short term reasons for tiered pricing are profit maximization. Differential pricing used by a monopolist enables the firm to maximize profits. The reason is that customers that can afford higher prices are charged higher prices. Those customers that can afford lower prices ...

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