Managerial Economics: A Comprehensive Analysis of Dell's Pricing

This report provides a comprehensive analysis of Dell's pricing strategies within the framework of managerial economics. It begins by examining the role of pricing in business success and how it is influenced by factors like competition and price elasticity of demand. The report then delves into Dell's specific pricing approaches, including its strategy of undercutting prices to gain market share and how it adapts its pricing based on the product lifecycle. A significant portion of the report is dedicated to the concepts of price elasticity of demand and how Dell leverages this understanding to set prices for its computers, considering factors like the availability of substitutes and brand loyalty. The report further explores Dell's price discrimination strategy, highlighting how the company charges different prices to various customer segments based on their willingness to pay. Additionally, it examines product mix pricing and price adjustment strategies, such as promotional pricing and allowance pricing, that Dell employs to maximize sales and profitability. The analysis provides a detailed insight into how Dell uses pricing as a key element of its overall business strategy.

Running head: MANAGERIAL ECONOMICS
Managerial Economics
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Table of Contents
Introduction......................................................................................................................................2
Pricing strategy of Dell....................................................................................................................2
Price elasticity of demand and pricing strategy...........................................................................3
Price discrimination strategy of Dell...........................................................................................5
Product mix pricing and price adjustment...................................................................................6
Conclusion.......................................................................................................................................7
References........................................................................................................................................9

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Introduction
In case of any business, pricing strategy plays an important role in determining success of
the business. Businesses need to take right decision about price in the complete life cycle of the
product. Pricing strategy varies depending on degree of competition, elasticity of demand and
other related factors (Kienzler & Kowalkowski, 2017). For example, if perfect competition
prevails in the market then no sellers has sufficient market power to control market price. In a
market with intense competition among rival groups business lowers price to increase its market
share. In such a market, consumers often experience a series of price reduction because of
intense rivalry among the sellers resulting in a price war. The resulting price war may cost the
firms in terms of a decline in revenue because of a significantly lower price. One important
determinant of pricing strategy of a business is the associated price elasticity of demand for the
product. If demand is relatively price elastic then it is profitable for business to lower price
(Pindyck & Rubinfeld, 2015). If demand in contrast is relatively inelastic then business can
increase revenue by increasing price. The paper discusses pricing strategy followed by Dell for
its computer taking considering relative elasticity of demand.
Pricing strategy of Dell
The company Dell Inc which operates with the brand name of Dell is a multinational
company having headquarter in United State. The company is named by its founder Michael Dell
and is involved in the business of personal computers, laptops, devices for data storage, software,
printers, network switches, computer peripherals and such others. Dell now has become one
leading brand for consumer durables. The company manufactures, designs, develops and markets
a variety of products along with offering customized product to satisfy need for both business
class customers and home or consumer class consumers (Bugert & Lasch, 2018). Some examples

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of Dell’s product offered to businesses and individual customers include Dell Precision
workstations, dimensions desktops, Optiplex desktop, Latitude and Inspiration notebook.
Pricing strategies of a company usually undergo changes along with different phases of
life cycle of the product since there is some constraints on freedom of the company to charge
price at various stages of production. Dell mainly aims to manufacture profitable and low price
personal computers for its customers. For his reason pricing strategy of Dell takes into
consideration affordability of its customers. Since, product of Dell is customizable, price
depends largely on customized services and opinion of the customers. In order to increase its
market share in the industry Dell is currently taking the strategy of undercutting prices (Hanna &
Dodge, 2017). The evaluation of pricing strategy of Dell requires clear understanding about
relevant elasticity of demand for Dell’s computer and other related aspects.
Price elasticity of demand and pricing strategy
Price strategy of businesses vary according to the price elasticity of demand faced by the
business. By definition, price elasticity of demand is an economic measure which estimates
variation in demanded quantity because of the corresponding variation in price. When demand
changes by a proportionately greater amount compared to price then demand is defined as
relatively elastic (Kreps, 2019). For goods having a relatively elastic demand, when firm
increases price of the good proportionate decrease in sales volume is larger than proportionate
increases in price resulting in a loss in revenue. Business in this case therefore should charge a
lower price to increase revenue since here sales volume increases by a proportionately greater
magnitude than decrease in price. In contrast, when proportionate change in demanded quantity
is less than the corresponding proportionate change in price then demand is considered as
relatively inelastic. Firms facing an inelastic demand for the product, when increase price then

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proportionate decline in demanded quantity is less than the associated proportionate increase in
price. Therefore, a lower price enables the company to earn a larger revenue. Here, if the firm
lowers price of the product, then resulted increase in sales volume is smaller than the associated
increase in price (Cowell, 2018). Hence, increasing price in this case ultimately increase revenue
of the business.
In determining price elasticity of demand for a particular good several factors play
important role. Among these factors the availability of substitutes is one vital determining.
Lower the number of substitutes lesser is the opportunity to customers to switch to other brand.
This makes demand relatively inelastic in nature giving firms opportunity to set a high price for
their offered product. In the beginning of 2000s, the degree of competition in personal computer
market was relatively less (Parvez et al., 2018). This allowed Dell to charge a relatively high
price and enjoy a higher revenue. In 2002, the average price of consumers’ personal computer
was $1084. The average price of same computer of its biggest competitor HP was $1009. That
showed price of HP’s computer was $75 lower than that of Dell. The average selling price of all
manufacturer in the group was $1020 which implied Dell’s price was $54 higher than industry
average. In 2005, the gap between price charged by Dell and its close competitors was even
increased. Dell’s computer price in 2005 was $854 which was higher than HP’s price by nearly
$200. The average selling price for the entire industry was $744. Dell’s ability to charge a high
price during this time was due to relatively inelastic demand resulted from brand’s loyalty of
Dell consumers. Higher price therefore resulted in a large revenue for the company (Liu, Zhai &
Chen, 2018). The attitude of Dell’s customers then was they should buy a Dell computer. The
direct selling model of the company gave it a relatively lower cost of business operation.

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The pricing strategy for personal computers sold to businesses however are different. The
average price of personal computers for businesses when considered with its product mix are
relatively lower than the same charged by competitor. This hurts its competitors and make them
vulnerable to the relatively high price charged by them. Average price of Dell’s business
computer was $1016 while that of HP’s was $1037 (Chen, 2017). Since Dell mainly targets
business consumers it keeps it average price lower than its competitors for business PCs. This
helps Dell to make considerable profit from its business consumers’ group.
The situation however changed overtime. With passes of time new competitors entered
the market along with an increase in market share. Competitors namely HP and Acer gained a
higher market share by introducing low-priced personal computers and notebooks. Gateway is
another major competitor of Dell (Jiang, Lee & Zomaya, 2016). This increases elasticity of
demand for Dell computer. Recently, Dell has adapted the strategy to lower price of computers
to regain its market share.
Price discrimination strategy of Dell
One characteristics of pricing strategy of Dell is the practice of price discrimination. Price
discrimination indicates strategy of seller where the seller charges different price to different
consumers for the same product. The price discrimination strategy is based on sellers’
understanding regarding some group of customers can be charged a higher price compared to
others (McKenzie & Lee, 2016). One vital condition for price discrimination strategy to be
successful is existence of different price elasticity of demand among different group of
customers. Sellers set different price to different customers depending on associated price
elasticity of demand. Knowing the price elasticity of demand, the firm charges a comparatively
high price to group of customers having inelastic kind of demand. Firm in contrast sets a lower

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price for customer group that have demand which is highly responsiveness to price. This kind of
strategy helps firm to maximize profit by allowing to extract as much consumer surplus as
possible.
Dell uses price discrimination strategy to maximize profit. The rapid spread of e-
commerce platform with the use of internet gives manufacturers of Dell huge opportunities to
practice different types of price discrimination. There is ample information available on internet
about the consumers purchasing Dell computers. The buyers themselves provide sufficient
information about the buying habit which gives the company scope to device discriminatory
practice (Browning & Zupan, 2020). To know detailed information about consumers and their
buying habit, it its website the company asks potential buyers to disclose whether the specific
buyer is a home user, small business entity, large business entity or government body. In 2006,
Dell declared price of its featured computer with a memory module of 512 MB and part number
A019340. The price however was different depending in different consumer segment. In case of
large business, the price was quoted as $288.99, the same for small business was $246.49, price
for a home user was $275.49 and for the government entity price was $266.21.
The price discrimination practice of Dell is explained by difference in willingness to pay
for buyers belonging to different market segments. Dell attempts to optimize its price and
charges a relatively lower price to the customer segment having a larger price sensitivity. An
interesting fact about attempts of Dell to set different prices to different group of buyers is that
customers aid the efforts put forward by Dell (Feng et al., 2019). Price in different segments are
set independently offering customers opportunity to choose whichever is the cheapest. Therefore,
buyers who are paying more are the group who are choosing to pay more possibly because of
their expectation prices may not differ so significantly.

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Product mix pricing and price adjustment
Two important characteristics of Dell’s pricing strategy are product mix pricing and price
adjustment. Product mix pricing strategy refers to setting price according to different line of
business. Dell positions different models of desktop in the market differently. Prices are set
according to market position of particular product. The product mix of Dell include ‘Inspiron
Desktops’ for home office computing, ‘XPS desktops’ for the ultimate experience, ‘Vostro
desktops’ for small business, ‘OptiPlex desktops’ for business class reliability and security and
such other (dell.com, 2020). Optimal product pricing is another commonly used pricing strategy
by Dell. In times of selling personal computer Dell offers its customers option of personalizing
their own purchase. Each customization has different cost. Customers here pay an additional
amount for each of the added feature. Dell also adapts the strategy of bundle pricing where it
sells various product together as a bundle or a cluster at the discounted price. The product
bundles are offered with attractive price with added customization (Xie, 2017).
In order to maximize sales and profit Dell often adapts price adjustment strategies. Some
common strategies of price adjustment made by Dell are discounted price, promotional pricing
and allowance pricing. Dell offers various attractive deals to its customers in the course of a year.
Time period of the deals depends on specific season and associated demand. To make a product
cheaper to the online customers Dell offers free delivery. Dell also gives time to time allowance
to its customers. Customers are given the option to make payment for the purchase at a later date
depending on the credit agreement (Li & Hou, 2019). Promotional pricing is another strategy
adapted by Dell to increase its market share and outweigh its competitors. The direct supply
model of Dell allow the company to offer its products at a relatively lower price without badly
affecting its financial position.

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Conclusion
Pricing strategy of a company undergoes changes at different phases of product life cycle.
Dell is one of the leading brands in the computer and laptop industry. Dell adapts various pricing
strategy to attract as many customers as possible and maintains its position in the industry. One
crucial determinant of pricing strategy is the price elasticity of demand. In earlier decades,
because of a relatively smaller number of competitors demand for Dell computer was relatively
inelastic allowing the company to charge a high price. Overtime competition grows in the
industry making demand elastic. Therefore, to increase its revenue and profit Dell needs to cut
price of its PCs. Dell adapts the strategy of price discrimination where it charges a separate price
to different customer group depending on respective price elasticity of demand. Product mix
pricing, optimal pricing strategy, price adjustment mechanism through discount, allowance or
promotional prices are some characteristics of Dell’s pricing strategy.

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References
Browning, E. K., & Zupan, M. A. (2020). Microeconomics: Theory and applications. John
Wiley & Sons.
Bugert, N., & Lasch, R. (2018). Effectiveness of responsive pricing in the face of supply chain
disruptions. Computers & Industrial Engineering, 124, 304-315.
Chen, C. S. (2017). Price discrimination in input markets and quality differentiation. Review of
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Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.
dell.com (2020) Desktop PCs, Workstations & All-in-Ones | Dell UK. Dell. Retrieved 17
January 2020, from https://www.dell.com/en-uk/work/shop/cty/sc/desktops-n-
workstations?s=bsd&c=uk&l=en&redirect=1
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Li, Y., & Hou, Y. M. (2019). Joint Pricing and Inventory Management with Regular and
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