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and finance Allah shmoop How does differential analysis affect pricing

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decisions How well nicely we hope Yeah here's the basic

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gist of differential pricing analysis that whatever price we're currently

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charging for our pine scented hemorrhoid cream well it's not

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optimal right We want to set the ideal price so

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we can reap the ideal or maximum level of profit

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Underlying this whole discussion is the slope of the demand

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curve for the product So think about some examples here

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Let's step into a time machine and visit nineteen ninety

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eight The Land of Steve Urkal Blockbuster Video when it's

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so existed and peak market power for the Windows operating

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system Well simple is it seemed to us now there

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simply was no other purveyor of operating systems in that

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era And without an OS well your computer didn't work

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and you needed a computer to run your word processor

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to dial up the Internet and check your air Well

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email you know to play solitaire Well Microsoft could basically

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charge whatever it likes for that operating system At the

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peak Bill Gates and his pals charged about two hundred

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bucks a unit for their Windows operating system to be

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installed in your computer so you could use it well

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The demand curve for Windows in this era Well it

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was almost vertical like they could raise prices with impunity

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and the volumes they sold would barely diminished So people

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didn't have any other choices if they wanted a functional

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computer and so they'd pay quote anything unquote for the

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Microsoft OS The opposite is true for pure commodities right

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Think copper or bananas or chalk or missile grade plutonium

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We'LL Copper is the same copper no matter where it

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comes from there are different purity ranges but inside those

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standards it doesn't make a difference whether the copper came

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from Chicago or Nairobi or Southeast Moscow Well it comes

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in boxes and bins and it's the same everywhere It's

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hard to have a brand name in copper you could

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sell Maybe LeBron James endorsed copper and still not have

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much pricing power There are too many choices and each

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unit is essentially the same Nobody has any advantage in

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their product over anyone else And because of this fact

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if buyers can buy the same copper for a penny

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less per pound net of shipping in taxes and whatever

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other transport grief there is Well then they'LL buy it

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cheaper so that demand curve is almost flat like tiny

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moves in price mean a massive move in demand on

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the supply side of things The corollary positive element here

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comes from the leveraging of technology meaning that if you

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can find a way for robots using solar power to

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mind copper for ten percent less than the human labour

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mining system well then you can keep the same profit

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margins and sell the copper for way less than what

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everyone else is selling it for In real life most

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products fall somewhere between the nineteen nineties era windows example

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and the situation with a pure commodity like copper Well

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to find the optimal price you use differential analysis to

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test all the possible points along the demand curves You

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crunch the numbers to discover what each increase in price

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will do to the amount of items you sell Raised

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the price of dollar How many fewer units do you

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sell Lower it a dollar How many more do you

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sell Well once you have your data set you confined

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the point where your revenue and or profit are maximized

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it's basically your casino and you want to make sure

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that every table and every slot machine does just enough

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to keep everyone playing while bringing in max profits to

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the house And well if you have to bribe people

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with free cocktails to stay in their seats so be 00:03:30.9 --> [endTime] it booze or a commodity to

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