Question

1) Roberto​ Inc. operates a chain of luxury hotels in the​ Asia-Pacific region. It charges​ $540 for a one night stay. However when​ 90% of the rooms are​ occupied, Roberto charges a premium of​ 20% on room tariff for the remaining rooms. What pricing method has Roberto Inc. ​adopted? Explain your answer.

2) Due to a recent downturn in the economy, sales of luxury hotel rooms have been on a steady decline for the last 12 months. A market research study conducted revealed that Roberto Inc. can only sell one night stays for $440. Accordingly, Roberto Inc. has decided to revise its sales price per one night stay to $440. The annual target volume after the price revision is 240 one night stays. Roberto Inc. wants to earn 40% on its sales amount. Calculate the target cost per unit. Show your workings.

3) Roberto Inc.’s revised target price of $440 was based on market research. Explain other methods that could be used when estimating a target price.

Answer 1

1) Roberto​ Inc. operates a chain of luxury hotels in the​ Asia-Pacific region. It charges​ $540 for a one night stay. However when​ 90% of the rooms are​ occupied, Roberto charges a premium of​ 20% on room tariff for the remaining rooms.
- Roberto Inc. has adpoted the Peak Load Pricing method. In this method of pricing, the firms can charge different prices during different times. Suppose, if there is a peak in the demand of certain commodity , the firms will increase its prices to allocate their limited resources well. In this case, the Marginal costs will also rise due to the constraints faced (here, the number of available rooms).

In the diagram,
DD1 is the initial demand before the peak.
DD2 is the demand during peak season.
P1 is the initial price ($540)
P2 is the price after adding premium of 20%.
MR is the Marginal Revenue
MC is the Marginal Cost

The firms always sets price where MR = MC, the profit maximizing level of output. In this case, when the demand of the rooms increase, it will shift the demnad curve and the MR curve along the MC curve and its equilibrium level of output would be at Q2  where the corresponding price level will be P2 which is greater than the normal room tariff. This in turn will put the burden of higher production costs on the customers entirely.