CPP Dynamic Pricing & Revenue Management 3 — Questions and Answers
Question 1: A pricing analyst notices that price increases of 10% reduce unit volume by only 4%. What does this indicate about demand?
- Perfectly elastic demand
- Inelastic demand (Correct answer)
- Unitary elastic demand
- Perfectly inelastic demand
Correct answer: Inelastic demand
When a percentage price change causes a smaller percentage change in quantity, demand is inelastic (|PED| < 1).
Question 2: Overbooking in airline and hotel revenue management is justified because:
- It maximizes load factor when cancellations and no-shows are predictable (Correct answer)
- It reduces variable costs per unit
- It is required by government regulation
- It eliminates the need for dynamic pricing
Correct answer: It maximizes load factor when cancellations and no-shows are predictable
Statistical models predict expected no-shows and cancellations, allowing overbooking to fill seats/rooms that would otherwise go empty.
Question 3: In a dynamic pricing model, 'price elasticity segmentation' means:
- Charging higher prices during off-peak hours
- Identifying customer segments with different price sensitivities and pricing accordingly (Correct answer)
- Setting prices based on competitor average rates
- Bundling products to create perceived value
Correct answer: Identifying customer segments with different price sensitivities and pricing accordingly
Segmenting by price elasticity lets firms charge higher prices to inelastic segments and lower prices to elastic ones, improving overall revenue.
Question 4: Which of the following is a key risk associated with overly aggressive algorithmic dynamic pricing?
- Reduced data collection capability
- Price wars and margin erosion if competitors match every move (Correct answer)
- Increased fixed cost burden
- Loss of economies of scale
Correct answer: Price wars and margin erosion if competitors match every move
When competing algorithms mirror each other's cuts, both sides can spiral into price wars that destroy industry-wide margins.
Question 5: A theme park charges lower ticket prices on Tuesdays than on Saturdays. This is an example of:
- Time-of-day pricing
- Day-of-week demand-based pricing (Correct answer)
- Geographic price discrimination
- Bundle pricing
Correct answer: Day-of-week demand-based pricing
Charging different prices on different days of the week based on expected demand is a form of time-based dynamic pricing.
Question 6: Which term describes the maximum amount of revenue a company could theoretically earn if every unit were sold at each buyer's exact willingness to pay?
- Economic profit
- Contribution margin
- Perfect price discrimination revenue (Correct answer)
- Transfer price
Correct answer: Perfect price discrimination revenue
Perfect (first-degree) price discrimination captures the entire consumer surplus by charging each buyer their reservation price.
Question 7: A hotel's Revenue Management System (RMS) raises the minimum length-of-stay requirement from 1 to 3 nights for a holiday weekend. The primary goal is to:
- Reduce housekeeping costs
- Displace short-stay guests to fill the entire high-demand period with longer bookings (Correct answer)
- Comply with local zoning regulations
- Lower the average daily rate
Correct answer: Displace short-stay guests to fill the entire high-demand period with longer bookings
Minimum length-of-stay restrictions protect high-demand periods from being fragmented by short bookings that would block longer, more profitable reservations.
CPP Dynamic Pricing & Revenue Management 3
A pricing analyst notices that price increases of 10% reduce unit volume by only 4%.
What does this indicate about demand?