deadweight loss

Examples of deadweight loss in the following topics:

• Price Fixing

  • In neoclassical economics, price fixing is inefficient, transferring some of the consumer surplus to producers and results in a deadweight loss.

• Price Discrimination

  • More is produced than the non-discriminating monopoly case, and there is no deadweight loss.

• Predatory Pricing

  • Since competitors cannot sustain equal or lower prices without incurring losses, they may be forced out of business.
  • The incumbent will not mind so long as they can maintain these losses, which can be made up for once they raise prices above the would-be market level: after the weaker competitors are driven out, the surviving business can raise prices above competitive levels (to supra competitive pricing).
  • The predator hopes to generate revenues and profits in the future that will more than offset the losses it incurred during the predatory pricing period.
  • The strategy may fail if the predator cannot endure the short-term losses, either because it takes longer than expected or simply because the loss was not properly estimated.
  • The barriers prevent new entrants to the market replacing others driven out, thereby allowing supra competitive pricing to prevail long enough to dwarf the initial loss.

• Break-Even Analysis

  • ., there is no net loss or gain, and one has "broken even" .
  • A profit or a loss has not been made, although opportunity costs have been "paid", and capital has received the risk-adjusted, expected return.
  • For example, if a business sells fewer than 200 tables each month, it will make a loss.

• Competitor-Based Pricing

  • For example, if a firm sets a market share objective when the market size is fixed or declining, then this immediately signals that this gain in market share will come at the loss of a competitor.

• Handling Objections

  • Do not interrupt the buyer while he is speaking, as doing so can quickly close the deal and result in a loss of the sale.

• Success and Failure: Strategies to Improve Success

  • Ultimately, Wal-Mart left the German market with a loss of one billion dollars before tax.
  • Key business connections were lost, which resulted in the loss of major suppliers.

• Sales Promotion

  • Contests, coupons, giveaways, loss leaders, point of purchase displays, premiums, prizes, product samples and rebates are sales promotion devices.
  • Price pack deals offer a certain percentage more of the product for the same price while a loss leader offers a temporary reduction on a popular product's price in to stimulate sales for other products offered.

• Undifferentiated Targeting

  • Less risky: If all the efforts in one particular area goes in vain, still the eventual loss is less compared to a loss in the narrowly focused area.

• Market Share/Sales

  • Pricing decisions are always serious because they flow almost directly to the bottom line, so Reed Hastings (Netflix CEO) must have concluded that the short-term loss of income from cancelled subscriptions will be outweighed by the longer term gain in new subscribers who do not take the DVD-by-mail option.
  • Conversely, losses in market share can signal serious long-term problems that require strategic adjustments.