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Industrial Organisation 2022

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Pregunta:

Please provide a summary of Dorfman Steiner condition

Autor: Hjalmer Pedersen



Respuesta:

Dorfman-Steiner condition should not be thought of an exact quantitative decision rule. Other factors might also important. The rule is derived 'ceteris paribus' and ignores other strategic behavior, capacity and so on. However, the formula says that price elasticity of demand and the advertising elasticity of demand are crucial for the choice between a pricing strategy and advertising strategy. In the alternative version (II) the interpretation focuses on the extra income which can be generate for every advertising amount spent. I.e. the higher the markup the more it pays to increase sales using advertising (among other strategies)


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