Pricing strategies and discrimination for the firm

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Use the theory of price discrimination presented in this chapter to explain this strategy.

This is a case of applying international price discrimination. Publishers take advantages from textbook demand characteristics that allow it to charge different prices for similar textbook in United State and in India unrelated to the cost of the product or supply. Consumers in separate market demand charged at different prices for identical textbook bought. Somehow, international publishers distribute its textbooks around the world and tend to charge much higher for customers living in wealthier countries than in poorer nations.

In general, there are few basic requirements before international publisher decide to adopt price discrimination. Firstly, international publisher should make sure that they have certain level of market power that allows them to act as monopolist which enables them to charge price more than its production cost. In our case, we assumed that publisher has this power and able to charge price higher than cost either in United State or in India. Secondly, publisher must be able to differentiate students into separated groups. In our case, international publishers able to adopt price discrimination strategy because they could separate their market segments into difference price elasticity of demand. International publisher identify that price elasticity for students in United State is consider more inelastic compare with students in India. In this situation, international publishers are allowed to charge higher price in United State compare in India since the price elasticity is not too elastic. Thirdly, to retain this benefit, international publishers should able to enforce this scheme and avoid any condition that threatening their business, i.e. re-importation.

In our case, textbook that sells for $70 in United State (wealthier country) might sell for $5 in India (poorer nation). Since the purchasing power of consumers in India is not as high as in United State, without international price discrimination, number of sales in India would be significantly lower compare with sales generated in United State. Nowadays, most international publishers have low cost editions of textbooks for poorer country. The textbooks offered appear with lower paper quality, less color, lighters in weight, and wraps with thin soft cover. The prices among countries are various, in extreme, for poor country publishers charged nearly only 15% from the price charged to premium country. Fortunately, this pricing strategy allows publishers to gain extra sales in poor country since the number illegal duplication significantly decrease.

Willingness to Pay for a Textbook

As we know, price differences are generally influenced by the demand of the goods its self (demand-driven). Somehow, for international textbooks, we suggest that textbook prices are not purely driven by demand, it also indirectly influenced by few factors involved, as follows:

Status of the textbook

We suggest that the status of the textbooks in United State and India is different. In United State textbooks is an integral part of education system and suggested as a main reference for students. At this type of country textbooks are having a high status which publisher may charge higher price. In our case, textbook sold in US for $70 will be impossible to sell in India at the same price since the status of the book India is not as high as in US, a fully educated country. In sort, we might say that the higher status of a textbook in a country, the higher willingness to pay of students to have a textbook.

Market condition (Wealth level of population)

In extreme, we might say that the market condition between United State and India are far difference. Unites State consider as developed country that has wealthier level of population and India consider as developing country that has moderate wealth level in population. It is no doubt that in countries with better wealth level, publishers tends to charge higher price since the purchase power of that population is high compare with countries with lower wealth level.

Compulsory textbook (market driven)

In United State to have a textbook in course is compulsory. It is mentioned at syllabi, labeled as required textbook and will highly needed by students individually during the course. In US, professors directly ask students to read specific chapters and work with specific cases and questions in textbook as homework. This means, since it is compulsory for students in US to have a textbook individually, to have particular textbooks for students in US are more important compare with students in India. In other word, the willingness to pay for a particular textbook in US is higher than the willingness to pay for similar textbook in India.

Variety of suggested textbooks

In order to focus in one book, professors in United State usually use one single complex textbook which provided update material, as well as exercise question and case study for enriching student in application. However, although there are many similar books in the market, students will only prefer to buy one book that used by professor. In other part of the world, Professors in India never mentioned which book is mandatory. Professors only provide a reading list and several suggested books that might help students in their courses. With the option they have, students will go to bookstore and examine which book to choose. Since the power of selection in the hands of students (we assumed all suggested books are equal in intellectuality) whereas no obligation to buy particular textbook, mostly a book with lowest price will choose by students. This means that the demand of a textbook is also depends on the variety of suggested books.

Respect level of intellectual properties

In common, western countries are more concern about intellectual rights and properties. Develop countries reinforce this type of properties as intense as physical properties. Therefore in general, we suggest that students in United State are much concerned and give more respect to intellectual properties compared with India as developing country. At this perspective, we suggest that the willingness to pay of United State students are more higher than Indian Students since their level of respect in intellectual properties are higher.

Third-Degrees of Price Discrimination

There are three degrees of price discrimination, as follows:

First-degree, at this level price discrimination occurs where a firm charges a different price for each unit sold. Thus, the price paid is the marginal revenue to the firm of each extra unit sold.

Second-degree, at this level price discrimination occurs where the monopolist charges different prices for different quantities of the same product.

Third-degree, at this level price discrimination occurs where the monopolist is able to separate the market demand into two or more groups of customers and then charge each group a different price for the same product.

International publishers characterized its market demand by separate United State market and Indian market. This means that international publisher price strategy categorized in third-degree of price discrimination. Publishers has this capability because there is existences of market barriers that prevent students in United State to reach cheaper market (India) in order to save money by avoiding purchase textbooks in their own expensive market. At the same time, international publishers also have power to block Indian students (cheaper market) to supply textbook for expensive market (United State) in order to gain profit from the gap of the prices. In addition, to make it profitable, international publishers need to make sure that the price elasticity of demand in United State and India are difference. For instant, we consider that United State, the wealthier country can be categorized as inelastic market and India, the poorer country as elastic market. This accordance with the existence of different degree of willingness to pay of each country which explained why demands in poorer countries are more sensitive in price changing compare with wealthier country which prices as non-dominant factor that influence demand.

Figure 1 Elasticity of demand of International Publisher

For better understanding of how the third-degree of price discrimination works for international publisher, we provide Figure 1. However to work with our case, we need to assumed that marginal cost is constant and equal in both United State market and India market. Figure 1 tell us that United State market have relatively more inelastic demand curve D1 with its marginal revenue curve MR1 . India market which relatively have more elastic demand curve represent by D2 and marginal revenue curve MR2. To gain maximum profit in all markets, United State and India, and at these output level, international publisher need to reach MR equal to MC (MR = MC). The optimal price in United State is P1 and is India P2. This is the prices on demand curve that correspondents to the profit maximizing level of output as we can see in Figure 1. P1, the optimal price in United State is higher that P2, the optimal price in India. Typically, third degree price discrimination result stated that higher price are charged for relatively more inelastic demand (United State), and charged lower for relatively more elastic demand (India).

Strategy for Textbook Price Determination

In our case, in implementing textbook price discrimination, international publishers initially need to determine the willing price charge to its students in United State and in India. There are two factors of price determination regarding discriminating price for international publishers, internal and external. Costs of good and product life cycles factors represent internal factors. Student demand, worldwide competition, sales channels, and government consider as external factors. However, the goals in pricing determination represent internal policy of international publishers.

Student Demand

Student demand is the crucial factors for market oriented international publishers. However, international publishers which operated in United State are only starts its activity in India if there is a demand in that market. Different students in different country will be obviously demanding different textbook regarding on how important (willingness to pay factors) the textbook for student. Simply, the more important of a textbook will leads demand to increase. Indeed, International publishers are concern with this factor, once the level of important of a text book is high, international publisher will have opportunity to charge high price for that particular textbook.

International Publisher Competition

For market oriented international publishers global competition is a significant factor influencing price determination. In worldwide scale, prices need to be recalculated in order to absorb the challenge of global competition. International publishers need to monitor the price it charged, conduct research market and determine competition density existed in every single country. However, the crucial strategy at this level is to determine introduction price for incoming textbook. Student survey should be taken including study of direct competitors which published similar books. Finally at this stage, based on the result of survey provided from market and the level of strength of the company that can be identified, price decision can be taken. Publishers could charge students in United State and India at the same price with its closest competitor (intellectually identical book), lower or higher.

Product Costs

As mentioned before that product costs are not always related with price strategy in textbook industry. Publishers adopt price discrimination strategy that allow maximize its benefit. However, since product cost categorized as internal factor, publisher obviously have full control on how much will dollar costs associated for single textbook produce. In every level of price determination process, all the costs incurred should be added-up the total cost per unit. Once the total cost per unit is stated, International publishers could adopt several types of defining price, as follows:

Costs plus method, with this method international publisher are determined desire specific profit for particular textbook. The price of the textbook will be the product cost itself plus the desired profit.

Markup method, price will be defined by adding product cost with predetermined markup percentage.

Target returns method, this method using return on investment (ROI) as measurement indicator. International publishers determined markup percentage based on stated level of ROI.

Profit maximizing method, simply, international publisher charged its textbook with the price where marginal return equal to marginal cost.

Breakeven analysis method, international publishers determine the number of textbooks sold that generates revenue precisely to cover cost. With this method, international publisher will have knowledge how much extra textbooks need to be sold to achieve specific target of profits.

However, with the specific characteristic of textbooks market, in our case the most suitable method to adopt by international publisher is profit maximizing method. Whereas the combined marginal revenue (united State and India) are equal to combined marginal cost.

Textbook Life Cycle

To determine the textbooks life cycle, international publishers need to examine the current phase of its textbooks life in the market. This pricing approach also can be applied to determine the length of incoming new textbook life cycle. There are four phases of life cycle for textbook to be considered, as follows:

Entering phase; at this first phase usually publishers requires sales prices that maximizing its profit both in United State and India in order to gain payback in initial investment costs. In this phase publishers also considered that students are willing to pay at the full price since the book is new release or new edition.

Growth phase; at this phase the sales will be at it pick since the textbook currently use in most every markets international publishers into. At this stage publishers will enjoy stable market demand as stable as the prices. Generally this growth phase will retain for 2-4 years before publishers release the next edition.

Saturation phase; due to the obsolesces of current book or edition, the readiness of new edition and slightly deal with similar book from competitor or new entrances, this particular textbook will lose its consumer's (students) interest and price reduction might be a good decision to maintain sales of remaining stock. Anyway, in order to save money, some students don’t bother to buy new edition if they can get cheaper price from previous edition.

Declining phase; this is the last phase of textbook life cycle. Most of old edition stocks will be withdraw from stores and replace with new edition. Small number of stocks will still remain and offered with more price reduction. This phase is the end of the journey of the textbook, because sometimes the previous textbook is totally no longer relevant with current condition in term of the changing of global economy.

Some note for textbook life cycle, nowadays international publishers are required to be more sensitive with the rapid changes of global economy. This situation forced international publisher to cut their textbook life cycle shorter and release updated edition the previous version. However, by keep alert and productive, international publishers are considered as gain competitive advantage. Contrary, for student this situation consider unfavorable since it forced (at least) them to go to books store to buy new release copy instead of go to flea market for used books or borrow from their generous seniors.

Sales Channels

For international publisher, types of sales channels also contributed in making decision of choosing strategy to determine textbooks price. Consequently, different prices will be charge to different sales channel. The adjustment will depend on the types of sales channels, price of particular textbook in private bookstore in shopping center will be higher compare with the price charge in campus bookstore inside the university.

Government

Most governments usually do not interfere into textbooks price determination. However, in some case government may limit the maximum selling prices for a certain textbook in order to protect student interest. Somehow, in common, government will influence the price by applying taxes & custom duties as the part of the textbook price.

If the publisher decides to sell this textbook online, what problems will this present for pricing strategy? How might the publisher respond?

Problem presents when sell the textbook online

As mentioned before, International publishers need the existences of 3 conditions while adopt price discrimination. However, the problem when international publishers decide to sell its textbook online is that they lose one of these requirements. International publishers no longer have ability to retain their benefit since they open the barriers between students in United State and in India by provide one global price for their textbooks. This means that students in India will be charged at the same price with students in United Stated for the same textbook. In other word, International publishers lose its market benefits and ability to gain maximum profits from each segment. If international publishers stated its global price as high as in United State, it will lose market share in India because students in India couldn’t afford to buy the textbook. In other hand, if international publishers stated its global price as low as in India, it will lose opportunities to gain maximum profit in United State market because lower price in United State doesn’t mean students will buy the same second book.

Alternative Solutions for Publisher to Respond the Problem

There are few alternative solutions that publisher can adopt when decide to sale its textbooks online, as follows:

Delaying Overseas Sales, This alternative suggest that in few first months publishers may sale its new book/edition limited to United State (local) market only. With this alternative, International publishers will only respond purchase orders from students in United State. Therefore, students in India will need to wait until the premier months in United State ends. However, at that time students in India and other part of the world will gained with cheaper textbooks price. In our case, technically international publishers allowed to charge $70 on United States’ Students since the three basic adoption requirements of price discrimination strategy is not broken. However, after the premier months in United State sales ends, international publishers will begin to offer the book to the rest of the world and adjust its textbook price into global price that acceptable for student in poorer country such as Indian. This alternative solution will provide protection for students in United State as they pay premium price for the textbook they bought. In the other hand, this strategy will also retain opportunities of international publishers to gain maximum benefits from difference market.

Single Global Price, this alternative is more extreme. Instead of keeping the benefits of price discrimination, since the barrier is broken, international publishers may adjust and recalculate their textbook price into single global price. We suggest international publisher may lower United Stated price until 20-30 percent and sale the textbook to all over the world included India. This strategy may work if the price elasticity of demand in India (and the rest of the world) is not too elastic. Therefore, with this strategy international publisher will allow to retain its market share in United State and the rest of the world.

Differentiating product, this strategy will require more effort from publisher. With this strategy publisher will produce many adapted version in order to differentiate its product by using local example and data sources. Therefore, Students in United State will not interest to buy cheaper Indian version textbook since the example cases provided is local cases in India. This strategy will allow international publishers to retain its maximum profit (when marginal revenue and marginal cost are equal) because it still can discriminate markets by the prices.

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