Pricing

Abstract

American Airlines changes fares 500,000 times per day. Gasoline varies as much as 15¢ per gallon over a two mile drive. How do companies determine prices? The main theory involves price discrimination, or value-based pricing, which involves charging each customer what the market will bear. Sophisticated sellers create goods designed for specific groups of customers, selling intentionally damaged products to price-sensitive groups. The theory is illustrated with striking examples from IBM, airlines and more.

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