Yahoo! India R & D - Big Thinkers Series - "Pricing" March 5, 2008

Pricing
R. Preston McAfee, Research Fellow & Vice President, Microeconomics, Yahoo!
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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 consumer 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. Grocery stores advertise sale prices on milk, paper towels, cola and other items, even though the demand and cost of production didn't change. Why? Why are turkeys cheapest just before Thanksgiving, a time when demand is highest? These paradoxes have a common resolution.

R. Preston McAfee
Preston joined Yahoo! Research in 2007 as a Research Fellow and Vice President, Microeconomics, Yahoo!. He is responsible for the microeconomics research group focusing primarily on pricing, game theory, and strategy and mechanism design. Prior to Yahoo! Research, he was the J. Stanley Johnson Professor of Business, Economics & Management, and also executive officer for the social sciences, at Caltech. He formerly was a chaired professor at the University of Texas. Preston received his undergraduate degree in economics from the University of Florida, and master of science in mathematics, and a Ph.D in economics from Purdue University. The author of many academic papers on auctions, McAfee was one of the designers of the Federal Communication Commission’s first auction of radio spectrum rights for cellular phones, and over $20 billion has been raised with this auction.

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