Adapting the Price 229
➤ Location pricing:The same product is priced differently at different locations even
though the costs are the same; for example, theaters often vary seat prices according
to audience preferences for different locations.
➤ Time pricing:Prices are varied by season, day, or hour. Public utilities use time
pricing, varying energy rates to commercial users by time of day and weekend versus
weekday. A special form of time pricing is yield pricing,which is often used by airlines
to fill as many seats as possible.Price discrimination works when (1) the market is segmentable and the seg-
ments show different intensities of demand; (2) members in the lower-price segment
cannot resell the product to the higher-price segment; (3) competitors cannot under-
sell the firm in the higher-price segment; (4) the cost of segmenting and policing the
market does not exceed the extra revenue derived from price discrimination; (5) the
practice does not breed customer resentment and ill will; and (6) the particular form
of price discrimination is not illegal (practices such as predatory pricing—selling below
cost with the intention of destroying competition—are against the law).^21
Today’s Internet technology helps sellers discriminate between buyers as well as
helping buyers discriminate between sellers. For example, Personify software allows
companies to examine the “clickstream” of an on-line shopper, looking at the way that
individual navigates through a Web site. Based on that behavior, the software can
instantaneously target shoppers for specific products and prices. At the same time,
Web sites such as MySimon are giving buyers instant price comparisons on specific
products, while Web sites such as Priceline.com allow buyers to name their own price
for airline tickets, long-distance phone service, hotel rooms, mortgages, groceries, and
other goods and services—including an electronic yard sale for personal items.^22
These and other Internet innovations clearly signal the return to fluid pricing rather
than the fixed pricing approach that came into acceptance a century ago.
Product-Mix Pricing
Price-setting logic must be modified when the product is part of a product mix. In this
case, the firm searches for a set of prices that maximizes profits on the total mix.
Pricing a product line is difficult because the various products have demand and cost
interrelationships and are subject to different degrees of competition. We can distin-
guish six situations involving product-mix pricing:
➤ Product-line pricing.Many sellers use well-established price points (such as $200,
$350, and $500 for suits) to distinguish the products in their line. The seller’s task is
to establish perceived-quality differences that justify the price differences.
➤ Optional-feature pricing.Automakers and many other firms offer optional products,
features, and services along with their main product. Pricing these options is a sticky
problem because companies must decide which items to include in the standard
price and which to offer as options.
➤ Captive-product pricing.Some products require the use of ancillary, or captive,
products. In the razor industry, manufacturers often price their razors low and set
high markups on their blades. However, there is a danger in pricing the captive
product too high in the aftermarket(the market for ancillary supplies to the main
product). Caterpillar, for example, makes high profits in the aftermarket by pricing
its parts and service high. This practice has given rise to “pirates,” who counterfeit
the parts and sell them to “shady tree” mechanics who install them, sometimes
without passing on the cost savings to customers. Meanwhile, Caterpillar loses
sales.^23