Managerial Economics Case Report

國貿二 黃德葶 102207332經濟二 林尚賢 102502028財政三 鄭雅文 100207228

NCCU Swimming Pool

Outline

1.Introduction of NCCU Swimming Pool2.Pricing Policy1)Package Deal2)Direct Segment Discrimination

3.Externalities4.Problems & Solutions

Introduction of NCCU Swimming Pool

NCCU Swimming Pool

Opening Hours

Monday to

Saturday

06:00 to 22:00 (No Entry after 21:30)

Sunday 06:00 to 18:00 (No Entry after 17:30)

Holidays

Closed

Specifications

• 50 Meters, 8 Lanes• Water Depth ： Depth of 130cm at Both Ends Depth of 150cm in the Middle

Pricing Policy

Economics Analysis

Package Deal one time admission, monthly ticket, annual ticket……

Direct Price Discrimination discriminate among segments of buyers

Package Deal

• Charge buyer just a little less than her/his total benefit• Leave buyer with almost zero surplus

When a student wants to go swimming …..

Though I do not swim well, I want to cool down in the

pool in such a hot day.

I am not busy in the first

week of school, so why

not go swimming

Oh, how I love swimming! It can not only make me healthy but also help me lose

some weight. I want to go swimming every day.

one time admissio

n

monthly ticket

annual ticket

Admission

• Fees for NCCU students

per time monthly semiannually annually

$ 40 $ 250 $ 1,000 $ 1,600

XXX

• Fare for Students: $ 40/timeSuppose that the demand curve of student A is as the right

• D=MB=65-1.25q 、 MC=40when MB=MC, p*=40 、 q*=20-Student A is willing to swim 20 times semiannually

P

Q (time/semi-year)

40

20

MC

D=MB

65Willingness

to Pay$1,050

Payment$800

Buyer Surplus$250

Benefit

Ticket per Time

NCCU Earning ：$40*20=$800

Ticket/

Semiannually

NCCU Earning ：$1,000

40

20

MC

D=MB

65

40

20

MC

D=MB

65

Benefit

• Earning/semiannual($1,000)> Earning/time ($800)

• The difference between these two is the buyer

surplus taken away by the supplier

• Package Deal leave buyer with almost zero surplus

to increase the total profit

Ticket/

Semiannually

NCCU Earning ：$1,000

40

20

MC

D=MB

65 Total Profit Increases

Uniform Pricing

Complete Price Discrimination

Direct Segment Discrimination

Which one of the policy is applied by

NCCU?

Oh My God!!!What is the correct answer

Uniform Pricing

• Leave buyers a lot of surplus• MR = MC• Set the incremental margin percentage equal to the

inverse of absolute value of price elasticity of demand• (price ‒ MC) / price = ‒1/e

Price

Buyer Surplus

MC

Wrong

Complete Price Discrimination

• Know the entire individual demand curve• Leaves no buyer with any surplus• Sells to every potential buyer

marginal cost

marginal unit

$

0quantity

Wrong

Direct Segment Discrimination

• Price by segment• Fixed identifiable characteristic – basis for segmentation

• age• gender• nationality• location

• No re-sale

Bingo

NCCU applies direct

segment discriminatio

n poilcy

• In reality, complete price discrimination cannot be realized as the sellers do not have sufficient information

•Segments • Different incremental margin among segments• -1/e• Lower the IM% to segments with high demand

elasticities

Direct Segment Discrimination

Identity

On Campus

Off Campus

NCCU Swimming Pool Regular Fares

Elasticity

Students VS Faculties

Students’price elasticities are relatively higher

Faculties ‘ price elasticities are relatively lower

Faculties have higher incremental margin percentage set higher price

Law of Demand

Faculties VS General Public

Faculties General Public

Encourage faculties to swim more at school’s swimming pool by setting a relative low price (lower than the market price)

Control the numbers of general public by setting a relative high price, in order to keep the swimming quality at school

Comparison of the Prices of Swimming Pool Tickets in Taipei

CityPlace Parks and Street

Lights Office, Public Works Department, Taipei City Government

Taipei Wen-shan Sports Center

Taipei Chung-Cheng Sports Center

NCCU Swimming Pool

Fare $110 $ 110 $ 110 Faculties $60

General Public $150

Higher than $110

Lower

No Resale Among Segments

Students

Faculties

Student ID

Faculties

General Public

Faculty ID

Some Extensions

•Homogeneous segments•Heterogeneous segment

Situation 1 all consumers identical within segment

• Suppose NCCU Swimming Pool provides service for faculties and students at the same marginal cost of $30

• Students are willing to pay $50, while faculties are willing to pay $90 for swimming per time. The willingness to pay of both segments exceed NCCU Swimming Pool’s MC. Therefore, it should set the price at $50 for students and $90 for faculties

• NCCU Swimming Pool would earn incremental margin of $20 from each student, and $60 from each faculty

• NCCU Swimming Pool is able to achieve complete price discrimination through direct segment discrimination

Situation 2 uniform price within segment• If buyers within each segment are heterogeneous and NCCU lacks sufficient

information to identify sub-segments, then it could apply uniform pricing within segments.

• Let the demand be as shown in figure1 and 2 next page:• 1. Suppose that the profit-maximizing price of faculties is X, the price elasticity of

demand is -1.5, then NCCU Swimming Pool should set the price at X • Suppose the IM=1/1.5, (X-30)/X=0.67; thus, the price of a faculty fare is $90, which

the quantity demanded is 5 tickets (per week)• 2. Suppose that the profit-maximizing price of students is Y , the price elasticity of

demand is -8/3, then NCCU Swimming Pool should set the price at Y • Suppose the IM=3/8, (Y-30)/Y=3/8 ; thus, the price of a student is $48, which the

quantity demanded is 3 tickets(per week)

On Campus： Students VS Faculties

Faculty Student

Figure 1Figure 2

• The faculty demand is less elastic. Therefore, NCCU should set a relatively high incremental margin percentage on faculty fares

• Profit Contribution(Faculties) ： (90-30)*150=9000• Profit Contribution(Students) ： (48-30)*500=12000• Total Profit Contribution=$21000

Externalities

What kind of property is

NCCU Swimming Pool Belong to?

Quasi-public Goods

Excludability Non-excludability

Rival Private GoodsEx: Food, Clothing

Common ResourceEx: Ocean resources

Non-rival

Club GoodsEx: Swimming Pool

Public GoodsEx: National Defense

Externality?

Positive Externality

Swimming

Increase Income

Lower the medical

expenditure

Income VS Health

The curve labeled y(h) shows the impact of health on the level of income per capita. For higher values of h, workers are able to produce more output, so the curve is upward sloping.

Negative ExternalitySummer

Demand for swimming increases

More people

CROWED

One cannot enjoy swimming

Negative Externality

Due to the heat, people’s preference on swimming increasesDemand curve shifts to the right (D1 →D2), equilibrium price increases(P1 →P2)

Problems & Solutions

How to solve the externalities?• Swimming Pool (non-rival) • Crowed in summer

•Germs are likely reproduce in the crowed pool

• Affect the consumers’ right of swimming

Problem：Same prices in both summer and winter

Solution

• Set different prices among different seasons

Different prices in summer and winter

• Fewer demand in winter

• Excess Supply

• More demand in summer

• Excess Demand

D S D S

40

40

• Lower the price in winter

• Raise the price in summer

D S D S

40

40

20 60

This can solve the problem of excess demand and supply, which makes the price and quantity back to the equilibrium. Thus, it solves the problems caused by the externalities, for instance, crowded swimming pool in summer

Different prices in summer and winter

Other Suggestions

Increase swimming pool profit!!!

How to increase the profit?

• Set up swimming classes • Sell some swimming

equipment

Set up swimming classes

This can encourage those who don’t swim originally to consume, which increases the consumers in NCCU swimming pool. more profit

Sell some swimming equipment

• Swimming Pool Rules：Those who don’t wear swimming suit, goggles and swimming cap aren’t allowed.

• People who do not have the swimming outfit with them have lower price elasticity of demand to these swimming equipment. Therefore, swimming pool can increase its profit by selling these products.

Swimming cap

goggles

Swimming Suit

Last but not least, …..

Improve Facilities

Enjoy Swimming Time!!