ABSTRACT
Without perfect price differentiation, the firm must make trade-offs between charging higher prices with lower sales and charging lower prices with higher sales. Having a good understanding of what sales volume changes the firm can afford for given price changes is a very useful starting point before doing more sophisticated analysis on price optimization. However, in many cases firms would be more interested in what sales increment is required to profit from a price reduction, or what level of sales decline would make a price increase unprofitable. That is, the lost contribution caused by a lower price is equal to the gained contribution resulting from higher sales volume plus the gained contribution caused by lower variable costs. In some cases there is a need to undertake an investment in order to later implement a price change.
