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In terms of a table, let's just take a strong prior and think about the effect in terms of profits as we start thinking about some of these different pricing strategies. I don't want to move to an optimum pricing strategy -- what I'd like to do right now is just think about regions, the city, the suburban and the stores that were close to a club-warehouse, their competitors. They price the city stores higher, suburban stores in the middle, and in the stores that are close to their competitors they push the prices down. Basically, it's like a 10 percent increase in price or a 10 percent decrease in price across these zones. So, there is a .66 percent increase in profits over this yearly. With this probability greater than 90 percent of the uniform, I'm just trying to think about -- I have these 2 distributions and I've got the posterior profit function for the uniform strategy. What I do is take the 90 percentile and I just think about what's the mass that's above that point from one of these new strategies. I'm trying to get at the notion of whether I can measure this profit increase. Or is it going to be a 50/50 guess that I'm going to make higher profits. The point is that I'm going to be pretty confident that I'm going to be increasing my profits here. So the category elasticity zones -- what would be a better thing to do is to go back to that -- one of the first slides that I put up with the map of the category price elasticities. For my model I can compute some kind of elasticity that tells me what the effect on sales would be if I were to increase all my prices by 1 percent. So in some cases, as I said, that category elasticity is -2; in that city store, that would imply that if I were to increase my prices by 1 percent, I would drop my total movement by 2 percent. If anything, then, I would want to decrease my prices in those stores, and look for the stores that are price insensitive and I'd want to increase my prices there. Just as a rough plot, that would make sense and what would happen is that you would come out with something in the category elasticity zones. You would get 2 percent increase in profits, or 1.91 percent. I should mention that these are gross profits. So if the gross profits are about 25 percent, I'm giving a 2 percent in that gross profit of 25 percent. It may sound like a lot, but what's happening to the retailer is that the gross margin is about 25 percent, (what I pay out to my wholesaler), but at the final outcome, the bottom line, their profit margin is typically about 2 percent. So if their total profit margin is about 2 percent and you're taking about a 2 percent increase in a gross profit margin of 25 percent, this 2 percent really adds up to something.
What's happening is that the conclusion from the plots is that we should increase prices overall. What we should do is -- let's forget about having decreasing prices and let's just think about having two zones, one base price and another where we increase the prices. If we look beyond that and just change the entire pricing structure that this retailer is following by increasing all the prices by 10 percent. In that case you get a 21 percent increase in profits. The retailer is reluctant to move from where they are in doing a 10 percent increase. Yes, this does make some big differences in the way that consumers might perceive this store. And some of these things might be outside of the effects of this model. I don't have competitive data in here, so it's a concern and we're going to try to address that concern in the upcoming slides. But what I'd like to say is that the conclusion is that you want to increase prices. And you could do a big increase in profits by increasing prices.
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