Geoscience Reference
In-Depth Information
of different pricing policies. Among the most prominent such policies is
mill
pricing
, where players set prices at the source, which are not necessarily the same
at all of their facilities. Customers will then purchase the product at the facility they
have chosen to patronize and pay for the transport costs themselves and separate
from the payment to the firm for the goods. Almost all retail facilities use this
principle. A special case of mill pricing is
uniform pricing
, a policy, in which the
facility planner sets the same price at all of his facilities. This policy was used by the
“Motel 6” chain in the 1980s, until they chose to charge different prices at different
locales to better reflect their own cost structure.
Another principle is uniform delivered pricing. In this pricing policy, facility
planners will deliver the goods to their customers for a fixed “full price” regardless
of customers' locations. Domestic mail is a typical example of this type of pricing
policy. Clearly, in such a policy, customers that are located close to the facility
from which they receive the goods, will subsidize those who are located farther
away. A special case of this policy is “zone pricing,” a policy, in which the firm
has subdivided their market area into zones, such that a uniform delivered price is
charged in each zone. Typical examples are the outdoor store L.L. Bean that sells
canoes for one delivered price east of the Mississippi, and another price west of
the river, or postal services that typically charge one rate for domestic mail and (at
least) one for international mail. Spatial price discrimination is a policy that charges
customers a full price according to the customer's location. Its applications have
been severely limited by the Robinson-Patman Act of 1936, even though it does
provide some benefits to the customers; see, e.g., Anderson et al. (
1992
). Note that
uniform delivered prices and spatial price discrimination are boundary cases of zone
pricing; the former in case there is only one zone, and the latter in case each point
in space represents its own zone. Many contributions, especially those from the
operations research community, assume that prices are universal and fixed, which is
the case in legislated pricing or producer-administered mandatory prices.
The fourth component concerns the
rules of the game
the players adhere to. In
essence, this feature describes how individual players (re-) act. Consider the simple
case of pure location competition. In the latter case, players could simultaneously
choose their strategies, i.e., decide on the locations of their facilities. If at this point,
none of the players has an incentive to unilaterally change his position, we say that
a Nash (or Cournot-Nash) equilibrium has been obtained. Such a situation indicates
some stability. Note that all players have, at least potentially, the same information
available to them, even though perceptions may differ, indicating some symmetry
among players.
Things are getting somewhat more involved, if players have not only locations,
but also prices as variables. In such a case, we can employ a refinement of Nash
equilibria, viz., Selten's (
1975
)
subgame perfection
. Loosely speaking, a subgame
perfect equilibrium exists, if every subgame of a given game is a Nash equilibrium.
Applied to our type of problem, players may choose a “first location, then price”
strategy (see, e.g., Anderson and de Palma
1992
), i.e., all payers simultaneously
choose their locations, and in a second phase, they simultaneously choose their
prices. Many authors have chosen this route. At this point, we need to define the
