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Essentials of Pricing Analytics

This book provides a broad introduction to the field of pricing as a tactical function in
the daily operations of the firm and a toolbox for implementing and solving a wide range
of pricing problems.
Beyond the theoretical perspectives offered by most textbooks in the field, Essentials of
Pricing Analytics supplements the concepts and models covered by demonstrating prac-
tical implementations using the highly accessible Excel software, analytical tools, real-​life
examples and global case studies. The book covers topics on fundamental pricing theory,
break-​even analysis, price sensitivity, empirical estimations of price–​response functions,
price optimization, markdown optimization, hedonic pricing, revenue management, the
use of big data, simulation, and conjoint analysis in pricing decisions, and ethical and
legal considerations.
This is a uniquely accessible and practical text for advanced undergraduate, MBA
and postgraduate students of pricing strategy, entrepreneurship and small business
management, marketing strategy, sales and operations. It is also important reading for
practitioners looking for accessible methods to implement pricing strategy and maximize
profits.
Online resources include Excel templates and PowerPoint slides for each chapter.

Erik Haugom is Professor in Business Administration at Inland Norway University of

Applied Sciences, Norway.
“A refreshingly new approach to the teaching of pricing from a very practical point of
view.”
Nicholas Perdikis, Professor of International business,
Aberystwyth Business School, Aberystwyth University,
Wales, UK

“This book explains the impact of pricing on companies’ profit in a highly accessible way.
Excel examples help readers to further deepen their understanding of these topics. I highly
recommend this book to anybody who wants to learn the basics of pricing analytics in a
very short time.”
Peter Molnar, Associate Professor at University of Stavanger, Norway

“More and more businesses are embracing analytics. But not everyone can afford a price
analytics software. This book is a good way to get started, learn, and practice the pricing
fundamentals. The ‘cookbook’ approach breaks down the barriers to getting started. Now
every business professional can start answering real pricing questions by using a tool they
are familiar with.”
Stephan M. Liozu, Chief Value Officer of Thales Group

“Essentials of Pricing Analytics is a valuable and original contribution to the pricing lit-
erature. Managers and academics will appreciate up-to-date tools that enable them to esti-
mate demand curves, optimize prices and increase profits. Highly recommended.”
Andreas Hinterhuber, Associate Professor of Marketing,
Ca’ Foscari University of Venice, Italy
Essentials of Pricing Analytics

Tools and Implementation with Excel

Erik Haugom
First published 2021
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
52 Vanderbilt Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2021 Erik Haugom
The right of Erik Haugom to be identified as author of this work has been asserted by him
in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or utilised
in any form or by any electronic, mechanical, or other means, now known or
hereafter invented, including photocopying and recording, or in any information
storage or retrieval system, without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or registered trademarks,
and are used only for identification and explanation without intent to infringe.
British Library Cataloguing-​in-​P ublication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-​in-​P ublication Data
Names: Haugom, Erik, 1982– author.
Title: Essentials of pricing analytics: tools and implementation with excel/Erik Haugom.
Description: New York: Routledge, 2021. | Includes bibliographical references and index.
Identifiers: LCCN 2020026974 (print) | LCCN 2020026975 (ebook) |
ISBN 9780367363222 (hardback) | ISBN 9780367363239 (paperback) |
ISBN 9780429345319 (ebook)
Subjects: LCSH: Pricing. | Pricing–Computer programs. |
Microsoft Excel (Computer file)
Classification: LCC HF5416.5 .H378 2021 (print) |
LCC HF5416.5 (ebook) | DDC 658.8/160285554–dc23
LC record available at https://lccn.loc.gov/2020026974
LC ebook record available at https://lccn.loc.gov/2020026975
Figures 1.4, 9.3 and 9.5 are adapted from Pricing and Revenue Optimization by Robert L. Phillips.
Copyright © 2005 by the Board of Trustees of the Leland Stanford Jr. University. All rights reserved.
Used by permission of the publisher, Stanford University Press, sup.org
ISBN: 978-​0 -​3 67-​3 6322-​2 (hbk)
ISBN: 978-​0 -​3 67-​3 6323-​9 (pbk)
ISBN: 978-​0 -​4 29-​3 4531-​9 (ebk)
Typeset in Times New Roman
by Newgen Publishing UK
Visit the eResources: www.routledge.com/​9 780367363239
To Alexander and Leon
Contents

About the contributors  viii

Preface  ix

1 Introduction  1
2 Fundamentals of price theory  12
3 Segmentation and price differentiation  36
4 Break-​even analysis  49
5 Price sensitivity and willingness to pay  64
6 Empirical estimations of price–​response functions  82
7 Price optimization  105
8 Case study: Optimal prices of movie theater tickets  128
9 Markdown optimization  154
10 The hedonic pricing model  169
11 Revenue management  178
12 Big Data and pricing analytics  188
13 Monte Carlo simulation for pricing decisions  218
14 Conjoint analysis for pricing decisions  245
15 Acceptance, ethics, and the law  264

Bibliography  274
Index  277
About the contributors

Author biography
Erik Haugom holds a PhD in Managerial Economics, Finance and Operations from
the Norwegian University of Science and Technology and an MSc in Business
Administration from Copenhagen Business School. His employment experi-
ence includes positions as a taxi driver in Lillehammer, child welfare, and research
planner at Omnicom Media Group. Today he is employed as a Professor in Business
Administration at Inland Norway University of Applied Sciences. He is also project
manager of the ongoing research project, Innovative Pricing Approaches in the Alpine
Skiing Industry. His special fields of interest include energy price and volatility model-
ling and forecasting, risk analysis, risk management, demand and price analyses, and
econometric modelling and forecasting in general.

Contributor biography
Andrew Musau is a senior research fellow at the Inland Norway University of Applied
Sciences and a statistical consultant for the social sciences research institute
Agderforskning. He obtained his PhD in Economics and Management from the
University of Trento. His research interests are in behavioural and experimental eco-
nomics, energy economics and macroeconomics.
Gudbrand Lien has a dr. oecon (PhD) in finance and a cand. oecon. degree in business
administration from the Norwegian School of Economics (NHH), and a cand. agric.
degree in agricultural economics from the Norwegian University of Life Sciences. He
is currently a Professor in Business Administration at Inland Norway University of
Applied Sciences. His main fields of research have been within energy finance, energy
economics, agricultural economics, quantitative innovation studies, and econometric
modelling in general.
newgenprepdf

Preface

Essentials of Pricing Analytics –​Tools and Implementations with Excel is written for academics
and practitioners who want a “cookbook approach” to learning and understanding pri-
cing analytics. The book is an introductory text to pricing analytics and offers the basic
theoretical foundation needed to understand the numerical examples better.
Most of the material in this book is at the introductory level and the majority of readers
should be able to follow the examples without any prior knowledge of the field of pricing
analytics. It is an advantage to have some prior knowledge of microeconomic theory, or
at least a strong interest in quantitative analysis in general. Some of the topics covered
are at a more advanced level. An example is the chapter on conjoint analysis for pricing
decisions.
I would like to thank the many people who have contributed to improving this text.
These include Steinar Veka, Gudbrand Lien, Iveta Malasevska, Sophia Levine, Emmie
Shand, Louise Bolotin and three anonymous reviewers.
I would also like to thank students of the course, Pricing and Revenue Management, at
the Inland Norway University of Applied Sciences for their valuable feedback on earlier
versions of the manuscript.
Finally, I send very special and warm thanks to Andrew Musau, who has contributed
with writing and editing parts of the manuscript.
Lillehammer, 2020
Chapter 1

Introduction

In this first chapter, the following topics will be covered:

• The purpose of the book.

• The impact of price management on profit.
• Pricing analytics.
• Who can use pricing analytics.
• Alternative approaches to pricing.

1.1 The purpose of the book

The purpose of this book is to provide a broad introduction to the field of pricing
analytics with a special focus on how the various models can be implemented in Excel.
My main goal is that you as a reader can be helpful to a current or future manager when
they want answers to specific questions related to the use of pricing as a tactical or oper-
ational function from day to day. Examples of such questions, which I want you to be
able to answer, include:

• Do we have an opportunity to use price as a tool to increase operating profits at all

in this company?
• What is the impact on operating profits from price improvements compared to
improvements in costs?
• What change in sales volume is required for a 5% price increase to break even?
• What is the break-​even sales change for a range of price changes?
• How can we determine the uncertainty associated with a volume change stemming
from a specific price change?
• How can we estimate our customers’ willingness to pay from historical transactions
or empirical data?
• How can we use information about our customers’ willingness to pay to form price–​
response functions and subsequently adjust the price to maximize profits?
• How can we sell the same product or service to different buyers at different prices to
increase profits?
• How can we dynamically adjust, and possibly mark down, the price to maximize
profits?
• How can we make use of big data to make better pricing decisions?
2 Introduction

• What would make our customers accept a new pricing scheme?

• What are the ethical and legal aspects we should be aware of before implementing
new pricing schemes?

More generally, the focus will be on introducing you to a range of basic techniques that
are useful in many practical business situations, rather than on the technical nuances of
algorithms. By following the instructions in the book, you should be able to reproduce
all the examples and/​or exercises using Microsoft Excel. If you are not familiar with
Microsoft Excel, you should spend some time in the beginning to familiarize yourself
with the interface and some basic formulas for doing simple calculations in a spreadsheet.
The book is accompanied by Excel files containing both the examples and solutions to
the problems at the end of each chapter.

1.2 The impact of price management on profit

To illustrate how changing the price can affect the profit, consider the following model
that computes the total profit accruing from the number of items sold, v:

Z = pv − cv v − c f (1.1)

In this model Z is the total profit, p is the price, cv is the variable unit costs, v is the
volume, that is; the number of items sold, and cf is the fixed costs. The first term ( pv) in
Equation (1.1) constitutes the revenues, while the two latter terms reflect the total costs.
A local coffee shop has done a market survey of consumers’ preferences related to
regular black coffee. The survey indicates that setting a price of $1 per cup will lead to
a demand of 100 cups per day. Increasing the price to $2 reduces demand by 40 cups/​
day. It turns out that the variable unit costs associated with producing one cup of coffee
are $0.50 and the fixed costs are $20 (this will not affect the solution; why?). What price
should the local coffee shop charge per cup of coffee to achieve the highest profit?
To help the manager of the coffee shop with this problem, we can calculate the total
profit using Equation (1.1) and check which of the two price levels induces the highest
profit. This problem is small enough to be solved with pencil and paper. However, as
this book makes extensive use of Microsoft® Excel, we shall do the calculations needed
to advise the manager on what price that maximizes the profit from selling coffee in an
Excel spreadsheet. Another reason for implementing the problem in Excel right away
is that we can adjust the calculations quickly once new information arrives. And soon
enough the problems we want to solve get so big that just using pencil and paper would
be a very tedious task.
The results of the Excel calculations are illustrated in Figure 1.1 and show that char-
ging a price of $2 is most profitable. By charging a price of $2 instead of $1, the total
profit ends up at $70 instead of $30 even though the sales volume is 40 cups lower per
day at the high price level. Even though this example is simple, it illustrates the major
impact price can have on demand and profit. Without doing the survey, and the subse-
quent analysis, the manager could wrongly believe that a price of $1 induces the highest
profit.
 Introduction 3

A B C D
1
COMPUTING TOTAL PROFIT FROM SELLING COFFEE
2
3
4 Price Demand Profit (Z) Formula
5 $1.00 100 30 =A5*B5-0.5*B5-20
6 $2.00 60 70 =A6*B6-0.5*B6-20

Figure 1.1 Implementation of the profit function for two price/​demand combinations in Excel.

However, it is important to note already at this stage that there could be several other
good reasons for setting a price of $1 to achieve a demand of 100 cups, even though
this price in isolation induce a lower profit compared to setting a price of $2. One such
reason could be that the coffee shop sells other items, such as cookies, and that this
bundling aspect justifies a lower profit on the coffee.
Another aspect worth mentioning is the potential bias occurring in a survey where we
ask about the customers’ intended behavior instead of measuring their real actions. It
turns out that there rarely is a 100% match between stated purchase preferences and real
purchase behavior.
The manager of the coffee shop is somewhat concerned about this potential bias
and decides to run a simple price experiment. For four consecutive weeks the price is
adjusted by $1 per week. The price/​demand data for the four weeks are handed over to
us and are presented in Table 1.1
This time we decide to impress the manager even more with our Excel skills and
choose to first depict the relation between the various price levels and the corresponding
demand. This is presented in Figure 1.2. The dots in this figure represent the quantity
demanded (Y-​axis) at each price level, which is referred to as a price–​response function in
pricing analytics. As the data points are discrete, we refer to it as a discrete price–​response
function. A price–​response function specifies the quantity of coffee cups demanded
at various price levels for this particular coffee shop and therefore contrasts with the
market demand curve for coffee. An illustration of the price–​response function will help
the manager to understand how the quantity of coffee demanded varies by price for her
own shop. The information in this graph can also indirectly be used to imagine how a
continuous price–​response function may look. This will become clear in later chapters.
The objective now, though, is still to set the price that will maximize the total profit
accruing from selling coffee. Hence, we should make it easy for the manager to make the
correct decision based on the data we have at hand. To do so, we can calculate the profit

Table 1.1 The price experiment results for the coffee shop

Week Price Demand

1 $1.00 121
2 $2.00 84
3 $3.00 42
4 $4.00 12
4 Introduction

140

120

100
Demanded quan ty
80

60

40

20

0
$0.00 $1.00 $2.00 $3.00 $4.00 $5.00
Price

Figure 1.2 A discrete price–​response function for coffee based on the data given in the text.

120

100

80

60

40

20

0
$1.00 $2.00 $3.00 $4.00

Figure 1.3 Total profit accruing from selling coffee at various prices.

using the same formula as in Figure 1.1 and then create a graph that shows the results.
This is done in Figure 1.3.
The graph clearly shows that charging a price of $2 induces the highest profit. In fact,
the difference between the optimal price and the next-​best price in this example is as
much as 25%. The impact from improved price management on operating profit has also
 Introduction 5

been documented in published research. Marn and Rosiello (1992) found that improved
price management has the biggest financial impact on operating profit when compared
with variables such as variable costs, sales volume, and fixed costs. Therefore, being good
at pricing analytics seems like a good investment.
Another key lesson to learn from the above example is that the revenue part of the
profit function consists of two elements: One price element and one quantity element.
The coffee shop is doing a trade-​off between selling more cups at a lower price versus
selling fewer cups at a higher price. What price level that will induce the highest profit
depends on the sizes of the price and quantity elements when moving from one price level
to another. This is linked to the characteristics of the market the coffee shop operates in
and the preferences the customers have for the coffee sold at this particular coffee shop.
These characteristics will always be reflected in the price–​response function. We shall
examine this in detail in later chapters.
In the above example we have performed pricing analytics to help the coffee shop man-
ager to make a pricing decision. But what exactly is pricing analytics? As the title of the
book includes these words, we should devote a section to defining it.

1.3 Pricing analytics

Put simply, we can say that pricing analytics is all about transforming data of some sort
into insight for making better pricing decisions. Pricing analytics is usually concerned
with the short-​term, tactical or operational, part of pricing, in contrast to strategic pri-
cing, which is more related to the long-​term pricing decisions on how value should be
created and captured.1
In the coffee shop example, the data we used were information about price levels and
corresponding demand, and the costs associated with producing coffee. These data were
then transformed into calculations of profit levels, which in turn could be put forward
to the management when deciding what price to set for one cup of coffee. The analytical
methods used can vary from very simple descriptive analysis to advanced dynamic opti-
mization. We shall introduce you to a range of techniques later in this book.
In the coffee example there was only one product: Black coffee. This product was
offered only at the coffee shop and we did not distinguish between various customer
types. In practice, however, the coffee shop probably offers multiple coffee types (e.g.,
café latte, cappuccino, espresso, etc.). It may also sell the various coffee types through
different sales channels (e.g., at the coffee shop, home delivery in a thermo cup, at the
local sport stadium during home games, etc.). Finally, it would be possible to differen-
tiate between various customer types based on some simple characteristics (e.g., students,
retirees, frequent buyers, etc.).
The three dimensions (product/​service type, sales channel, and customer type/​segment)
can be illustrated in what Phillips (2005) refers to as a pricing and revenue optimization
(PRO) cube. Such a cube is presented in Figure 1.4. The aim of pricing analytics is
always to find the right price for each of the relevant elements of the cube, and to update
these prices over time. We emphasize relevant because some of the elements in the cube
may be empty (e.g., only black coffee is offered for home delivery), or some elements
may be constrained by factors outside our control. In theory, each element of the cube
could have its own unique demand characteristics, which in turn would lead to unique
6 Introduction

Product Customer Type

Figure 1.4 Dimensions of the pricing and revenue optimization cube. Source: Phillips (2005, Figure 2.4,
p.27: The PRO cube). Reproduced by permission of the publisher, Stanford University
Press. The gridlines are not included in the original version of the figure, but added for this
publication.

optimal (profit-​maximizing) prices. Additionally, market conditions change rapidly, and

the right price today could be wrong tomorrow.

Pricing analytics as a continuous process

Because of the very rapidly changing conditions in most markets, pricing analytics can
be considered a continuous process where new information must be incorporated in
the analysis as soon as it arrives. A simplification of such a process is illustrated in
Figure 1.5. The pricing analyst first receives the raw price/​demand data, then builds a
model that aims to optimize the price. The model is then solved, and the suggested price
level is implemented. After having executed a given pricing scheme, the performance is
monitored and evaluated, and the models are updated using the latest information. In
today’s e-​commerce, such updates may be done automatically, at a very high frequency
in some cases.
In practice, the pricing process depicted in Figure 1.5 must be carried out for each
element of the pricing cube and the analysis may also consider restrictions or depend-
encies occurring between the various elements. It is, however, always convenient to start
simple and then expand the model and process of optimizing prices for the whole port-
folio of products or services once we understand the important aspects of the key elem-
ents involved. We shall therefore start by looking at single products or services when we
perform pricing analytics in the subsequent chapters.

1.4 Who can use pricing analytics?

Pricing analytics as a tactical and operational function has been derived mainly from
the field of management science, and the use of quantitative techniques to set prices in
 Introduction 7

Price/Demand Model
Solution Execute pricing
data construction

Monitor and
evaluate
performance

Figure 1.5 Pricing analytics as a continuous process.

complex and dynamic environments is relatively new (Phillips, 2005).2 The passenger
airline industry was one of the first industries to systematically apply these techniques to
increase profitability. Today, pricing analytics is used everywhere. The only requirement
is that you have a product or service that is offered in a market.3 However, it turns out
that many of the techniques are particularly applicable in the service industry. The main
reasons for this are that service providers usually have fixed capacity with low costs of
marginal sales and high fixed costs. Hence, price can be used to form demand to exploit
existing capacity. Therefore, many of the examples used in this book will stem from the
service industry.

1.5 Alternative approaches to pricing

From Equation (1.1) we understand that pricing analytics incorporates costs and cus-
tomer demand (defined as volume in the equation) to find the profit-​maximizing price.
Later in the book we shall also see that the competitive environment is indirectly
accounted for in the techniques we use to find the optimal prices. Other approaches
to pricing tend to emphasize either costs, customers, or competitors when determining
the price.
Examples of such alternative approaches include (but are not limited to):

• Cost-​plus pricing: Calculating costs and adding a margin to the costs when setting
the price.
• Market-​based pricing: Setting prices based on our competitors’ actions.
• Customer-​driven pricing: Places the customer at the center of the pricing decision.
• Value-​based pricing: Setting the price based on estimates of how customers value the
firm’s product or service.

When applying pricing analytics, we try to incorporate all these aspects with the
objective of maximizing operating profits. However, it is important to note that the pro-
cess of setting the right price in both the short and long-​term is a very complex task
that involves many departments and people. Therefore, we must make some simplifying
assumptions when building the analytical models.
8 Introduction

1.6 Summary
• The purpose of this book is to provide a broad introduction to the field of pri-
cing analytics with a special focus on how the various models can be implemented
in Excel.
• Price management has a major impact on operating profit.
• Pricing analytics is all about transforming data of some sort into insight for making
better pricing decisions.
• All companies having a product or service that is offered in a market can apply pri-
cing analytics, but many of the techniques are particularly applicable in the service
industry.
• Alternative approaches to pricing are: (1) Cost-​based, (2) market-​based, (3) cus-
tomer-​driven, and (4) value-​based.

1.7 Problems
1. The ice cream shop Icy has just completed a market survey examining expected
demand at various price levels for one of their products –​Icy Cool. The data are
summarized in the table below:

A B C
1 RESULT OF MARKET SURVEY
2 FOR ICY COOL
3
4 Price ($) Demand Profit
5 0.5 500
6 1 300
7 1.5 100
8 2 50
9 2.5 20

You also know that the variable unit costs associated with producing this ice cream
type amount to $0.25 and that the fixed costs are $100. Your job is to calculate the
total profit for each price/​demand combination and give your advice to the manager
of Icy about what price to set for this product.
2. In the same market survey, Icy examined the expected demand for another ice cream
type. The data for this product is given below:
 Introduction 9

A B C
1 RESULT OF MARKET SURVEY
2 FOR ICY HOT
3
4 Price ($) Demand Profit
5 0.5 200
6 1 180
7 1.5 170
8 2 150
9 2.5 100

The variable unit costs for this ice cream type is $0.45 and the fixed costs are still
$100. What price would you recommend setting for this ice cream type?
3. Fill in as many element names as possible in the figure given below: You can, for
example, insert numbers in the boxes and list them next to the figure: e.g., 1. Black
coffee, sold in a physical coffee shop to customers with a student ID card.

Customer Type
Product

4. Back to Icy: It turns out that you can also sell Icy Hot at the local sport stadium
during home games. You have been given information about the (average) expected
demand at the various price levels during home games (see table below).
The variable unit costs are $0.65 and the fixed costs are $50. This time you shall
create a simple spreadsheet model where you include the variable unit costs and
fixed costs in separate cells. Then you shall illustrate in a graph how the profit varies
according to the price level (similar to that presented in Figure 1.3). What price
should Icy charge for Icy Hot at the sport stadium during home games to maximize
(expected) profit?
10 Introduction

Price ($) Demand

0.5 600
1 500
1.5 450
2 390
2.5 350
3 250
3.5 150
4 50

5. Various approaches to pricing are presented below. Determine what the actual price
set by the firm will be in each case and specify what kind of pricing approach that is
used in each case.
a. The variable unit costs associated with producing an item are $15. The company
adds a surcharge equal to 60% of the variable unit costs to determine the price.
b. Three competitors of a company quote the following prices for a widget: A,
$15; B, $20; C, $22. Our price is set such that it is consistently 10% below the
average of these three main competitors.
c. The relationship between the price and the demanded quantity of a widget a
firm produces is illustrated in the figure below. Set the price such that the firm
guarantees a sale of 5,000 units of the product in the next month.

Price and demanded quanty for a widget

14000

12000

10000
Demanded quanty

8000

6000

4000

2000

0
0 10 20 30 40 50 60
Price ($)
 Introduction 11

d. The following data relates to a survey measuring the perceived value of a service.
Determine the price charged for the service, given that price is at 5% below the
perceived value.

Customer Perceived value

1 19
2 19
3 19
4 12
5 15
6 17
7 15
8 18
9 15
10 13

6. What is pricing analytics?

7. What are the most crucial steps involved in the pricing analytics process?

Notes
1 This is a simplification for expository purposes. Nagle et al. (2011) provide a comprehensive
examination of the term strategic pricing. Interested readers should consult their book to gain
a deeper understanding of this concept.
2 The theoretical foundation, mostly derived from the field of economics, has been around for a
long time.
3 And in the absence of perfect competition. We shall return to the various market structures in
Chapter 2.
Chapter 2

Fundamentals of price theory

In the last chapter we saw how the key to setting an optimal price is information about
the price–​demand relationship. The coffee shop had to know the quantity demanded
at various price levels. Before going deeper into how firms should set, and adjust, the
prices of their products or services to maximize profit, we present the fundamentals of
the classical economic theory involved to explain the shape of price–​response functions.
Remember the difference between the market demand function and the price–​response
function? The distinction is important as it is the quantity demanded for your particular
product or service that matters when optimizing the prices of these, not the quantity
demanded of this product or service category in the whole market. Hence, when we
illustrate the theoretical concepts, the focus will be on one element of the PRO cube at
the time.
The chapter covers the following topics:

• Consumer preferences and the link to price–​response functions:

• Indifference curves;
• Budget lines;
• Utility maximization;
• The link between price changes, the budget line and the price–​response function;
• Consumer surplus.
• Costs that matter in pricing decisions.
• An example of where the objective is to decide the optimal price and quantity.
• The role of pricing under various market structures.

Discussion in this chapter is limited to the fundamental theoretical concepts needed to

perform pricing analytics. Readers interested in a deeper understanding should consult
a textbook in microeconomics.

2.1 Consumer preferences and price–​response functions

To fully understand the shape of price–​response functions, and how they may change
with the price of competing products or services, we need a model of consumers’ behav-
ioral choices. The theory of consumer behavior can be used to understand the relation-
ship between consumers’ limited income and their consumption of various goods and
services. This theory is thoroughly covered in most textbooks in microeconomics and
 Fundamentals of price theory 13

a detailed description is beyond the scope of this textbook. Here, the focus will be on
illustrating the fundamentals of the theory in a pricing analytics framework.1 We shall
do this by presenting the decision problem of an economic agent wanting to maximize
her utility from consuming black coffee while visiting the city center during a given
week. We start by illustrating the consumers’ preferences graphically. Then we include
the budget constraint2 and show how this is linked to the prices and consumption of
black coffee in Shop X and Shop Y. Finally, we show the link between price changes and
consumption changes when the consumer allocates her income between black coffee
sold in Shop X and Shop Y, respectively. That is, we show how the shape of the price–​
response function is formed.

Indifference curves, budget lines, and the utility maximization problem

The classical model of consumer choice assumes that consumers have preferences
for specific products or services. In the case of regular black coffee bought in the city
center, this means that a potential consumer will either (1) prefer regular black coffee
sold at Shop X, (2) prefer regular black coffee sold at Shop Y, or (3) be indifferent about
the two.3 The concept of indifference can be visualized in what is called an indifference
curve. This is done in Figure 2.1. All the combinations of cups of coffee bought from
Shop X and Shop Y along the curve give the consumer the same satisfaction (e.g.,
points A, B, and C). The combination in point D is clearly worse than any combin-
ation on the indifference curve and will not be chosen by any rational consumer. Any

Shop Y
(cups/week)

An indifference curve
10

E
8

6 A
Indifference
curve
D
4 B

2 C

0 Shop X
1 2 3 4 5 (cups/week)

Figure 2.1 Illustration of an indifference curve.The consumer is indifferent about combinations of cups

of black coffee bought in Shop X and Shop Y on the indifference curve.
14 Fundamentals of price theory

combination above the curve, for example point E, will be chosen over the combinations
at or below the indifference curve. As the indifference curve presents combinations of
two goods or services that induce the same level of satisfaction, they are often named
iso-​utility curves in the economic literature. Further, the term market basket refers to
the combination of cups purchased at Shop X and Y. In general, a market basket could
refer to the quantities of food, electronics, movie theater tickets and other goods and
services that a consumer buys each week, month, or year. For expository purposes,
we shall continue to look at a simple market basket consisting of specific quantities
of two goods only; cups of black coffee bought in Shop X and Shop Y each week.
Even though the product may seem the same (black coffee), it is not. Why? Because it
is offered at two competing shops (X and Y). The use of the same product at different
shops highlights the important difference between the market demand curve and the
price–​response function.
We now know that any market baskets (that is, combination of cups of black coffee
bought from Shop X and Shop Y) on the indifference curve induce the same level of sat-
isfaction for this specific consumer. But how many cups of black coffee will this consumer
end up buying from Shop X and Shop Y per week? To answer this question, we first need
information about the consumer’s budget for regular black coffee per week, and the price
of one cup bought at Shop X and Shop Y. In other words, we need the budget line.
The total budget the consumer has available to spend on black coffee, in the city
center, is $10 per week. One cup of regular black coffee is priced at $2.00 at Shop X and
$1.00 at Shop Y. This means that the budget constraint can be formulated as:

2.00X + 1.00Y + ≤ 10 (2.1)

To plot the budget line, we simply need to determine two points that are on the line and
then draw a straight line through these points. This can be done by treating the constraint
as an equation (which means that the consumer uses the total budget of $10, nothing
less) and then calculate how many cups the consumer could buy at Shop X if buying all
the cups there, and vice versa. We find the first point by letting Y = 0 and solving for X:

2.00X + 1.00 ( 0 ) = 10
10
X= =5
2

This means that the consumer can buy five cups of black coffee sold at Shop X every
week. Alternatively, the consumer can buy ten cups at Shop Y:

2.00 ( 0 ) + 1.00Y = 10
10
Y= = 10
1.00

Now we have two points and can draw a straight line connecting these. This is done in
Figure 2.2 and the line is referred to as the budget line. All combinations of regular black
 Fundamentals of price theory 15

Shop Y
(cups/week)

Budget Line
10

0 Shop X
1 2 3 4 5 (cups/week)

Illustration of the budget line. All combinations on the line spend the entire budget
Figure 2.2 
of $10.

coffee bought at Shop X and Shop Y on that line will spend the whole budget of $10 –​
before any price changes take place.
Note that when drawing this budget line, we assume that it is possible to buy fractions
of cups of coffee. This is rarely possible in practice, of course, but it makes the illustra-
tion of the theoretical concepts much easier.
However, we still do not know how many cups of regular black coffee the con-
sumer will buy at Shop X and Shop Y per week. To figure this out, we need to com-
bine the information provided by the indifference curve and the budget line. Figure 2.3
combines the indifference curve from Figure 2.1 (the indifference curve is now labeled
I1 in Figure 2.3) with the budget line presented in Figure 2.2. All the combinations at,
or below, the budget line, are affordable by the consumer; for example, point A or point
B. At point A (four cups bought at Shop X and two cups bought at Shop Y), the entire
budget is used. We see this because the point is on the budget line. At point B (two
cups bought at Shop X and four cups bought at Shop Y) the consumer spends only $8
( $2 × 2 + $1 × 4 = 8 ). As the two points are on the same indifference curve, they yield the
same level of satisfaction and the consumer would be indifferent between the two points
A and B. However, the consumer can do better. Because of the assumption that more is
better than less the consumer will always strive to achieve a higher level of satisfaction.
This is illustrated with a new indifference curve, I2. All market baskets on this new indif-
ference curve generate a higher level of satisfaction to the consumer. The question then
is, can she afford any of these market baskets? The answer is only one of the market
baskets on indifference curve I2 can be affordable, and that is the combination at point
C (two cups bought at Shop X and six cups bought at Shop Y). At this point, it is
16 Fundamentals of price theory

Shop Y
(cups/week)

10

Maximum
satisfaction given
8 budget constraint

C
6

B
4

I2
2 A

I1

0 Shop X
1 2 3 4 5 (cups/week)

Figure 2.3 Maximum satisfaction given budget constraint.The total budget is $10 (budget line) and two
indifference curves indicate a low-​(I1) and a high (I2) level of utility.

impossible for the consumer to achieve a higher level of utility (satisfaction) given the
budget constraint of $10 per week. In other words, the consumer has maximized her
satisfaction by choosing point C.
So far, we have seen how the quantity demanded of black coffee for a given con-
sumer can be found, given the shape of the indifference curve and the budget line. But
we do not know how the quantity demanded varies with the price level at Shop X or
Shop Y. That is, we do not know how the price–​response function for black coffee for
any of the two shops looks like. To make the link between indifference curves, budget
lines, and price–​response functions, we need to do one more thing: change the price for
black coffee at one of the shops. We start by showing how the individual price–​response
function can be obtained and then show that the complete price–​response function one
of the coffee shops is facing is simply the sum of the demanded quantity by the indi-
vidual consumers at every price level.

The link between price changes, the budget line and the
price–​r esponse function
The left panel (a) of Figure 2.4 illustrates the effects on the budget line of a price increase
from $1.00 to $1.50 for one cup of black coffee at Shop Y. The total weekly budget for
black coffee for this consumer is still $10, but the increased price of coffee at Shop Y
induces a new budget line. This new budget line is found using the same approach as for
the original line, but now with the updated price level at Shop Y.
 Fundamentals of price theory 17

The number of cups bought at Shop X if buying zero cups at Shop Y is still five. Why?
Because the price of coffee at Shop X has not changed:

2.00X + 1.50 ( 0 ) = 10
10
X= =5
2

However, as the price at Shop Y has increased, the number of cups we can buy if
spending the entire weekly coffee budget there must decrease:

2.00 ( 0 ) + 1.50Y = 10
10
Y= = 6.67
1.50

That is, because the price increased from $1.00 to $1.50, we can now only buy 6.67 cups of
coffee at Shop Y per week. The new line is again found by drawing a straight line through
the two points. This is done in panel (a) of Figure 2.4. We can clearly see that the price
increase at Shop Y changes the potential market baskets the consumer can choose. To
further illustrate this, we include indifference curves that trace out the market baskets that
maximize the satisfaction at the two price levels (panel (b) of Figure 2.4). Before the price
change, the consumer would choose a market basket consisting of one cup bought at Shop
X and eight cups at Shop Y (point A). After the price increase, the consumer achieves
maximum satisfaction by consuming two cups at Shop X and four cups at Shop Y.
We now have two discrete points of both price ($1.00 and $1.50) and quantity
demanded (eight and four) at Shop Y, and could have plotted these in a diagram to
obtain an estimate of a linear price–​response function. However, to better illustrate how
the individual price–​response function is formed, let us do one more price change. This

Shop Y Shop Y
(cups/week) (cups/week)

10
(a) 10
(b)

Maximum
8 8 A satisfaction
Original old price
budget line
6 6 I1
Maximum
satisfaction
B new price
4 4
I2
Budget line
2 after price 2
increase at
Shop Y
0 Shop X 0 Shop X
1 2 3 4 5 (cups/week) 1 2 3 4 5 (cups/week)

Figure 2.4 Effects of a price increase at Shop Y on the budget line (a) and preferred market basket (b).
18 Fundamentals of price theory

Shop Y Shop Y
(cups/week) (cups/week)

(a) (b)
10 10
Price-
response
A D function
8 8
Shop Y

6 I1 6

B E
4 4
I2
C F
2 2
I3
Shop X Price Y
0 0
1 2 3 4 5 (cups/week) 1.00 1.25 1.50 1.75 2.00 (per cup)

Figure 2.5 Effects of a price increase at Shop Y on budget line (a) and the corresponding (individual)
price–​response function (b).

time we increase the price of one cup bought at Shop Y to $2.00. Given the same total
weekly budget of $10.00, the total number of cups we can buy at Shop Y is reduced to
five (why?). In Figure 2.5, the new budget line is depicted together with the two budget
lines from Figure 2.4. The indifference curves (I1, I2, I3) are included to show the utility
maximizing market baskets at the three price levels (points A, B, and C, respectively).
Panel (b) of Figure 2.5 illustrates the relation between demanded quantity and the price
at Shop Y. Point D indicates that eight cups would be bought at Shop Y at a price level
of $1.00. When the price increases to $1.50, the weekly demanded quantity from this
consumer drops to four cups at Shop Y (point E). Increasing the price further at Shop
Y induces another drop to two cups per week. Having quantity demanded on the Y-​axis
and price level on the X-​axis, the points D, E, and F now form a discrete price–​response
function for this individual consumer. To make it continuous, we simply draw a line
through these three points. In later chapters we shall learn various methods for drawing
such a line.
If Shop X and Shop Y were competing in a market where there was only one con-
sumer, the individual price–​response function illustrated in Figure 2.5 would also be
the complete price–​response function Shop Y was facing. In practice, this is not likely
though. The individual consumers’ price–​response functions need to be combined into
a single aggregate price–​response function, that is; the price–​response function faced by
Shop Y. To illustrate the concept, it is enough to look at a simple example where we have
two consumers instead of one. Table 2.1 does this. Consumer #1 in this table is the one
whose demanded quantity at each price level is depicted in Figure 2.5. Consumer #2 is
new and her demanded quantity at each price level is also given in Table 2.1. If these are
the only two customers in Shop Y’s market, we find the total quantity demanded at each
price level by aggregating the demand of the two individuals. This is done in the right-
most column of Table 2.1. The concept of aggregating the individual demand can also
be illustrated visually, as shown in Figure 2.6.
In the left panel of Figure 2.6 we see that the individual demands are simply stacked
on top of each other. The total demanded quantity is then just the sum of these two.
 Fundamentals of price theory 19

Table 2.1 Aggregating demand from individual consumers

Price Consumer #1 Consumer #2 Total

$1.00 8 10 18
$1.50 4 8 12
$2.00 2 6 8

Shop Y Shop Y
(cups/week) (cups/week)

20 20
A D
Price-
response
16 16 function
Shop Y
Consumer #2:
10 cups B E
12 12

Consumer #2: C F
8 8
8 cups
Consumer #2:
Consumer #1: 6 cups
4 4
8 cups
Consumer #1:
4 cups Consumer #1:
2 cups Price Y Price Y
0 0
1.00 1.25 1.50 1.75 2.00 (per cup) 1.00 1.25 1.50 1.75 2.00 (per cup)

Figure 2.6 Aggregating the individual demand of consumer #1 and consumer #2 from Table 2.1. Panel
(a) shows quantity demanded by the individual consumers while panel (b) illustrates the new,
aggregated, price–​response function for Shop Y. For expository purposes, the budget line
and indifference curves are dropped in this figure.

For expository purposes the budget line and indifference curves are dropped in panel
(a) of this figure. In panel (b) the corresponding total demanded quantity is illustrated
together with the price–​response function for Shop Y.

Consumer surplus
When having the aggregate price–​response function available, and if knowing the actual
price charged by Shop Y, we can also calculate what the economic literature refers to
as the consumer surplus. At the individual level, the consumer surplus is defined as the
difference between the maximum amount a given consumer is willing to pay for the good
or service, and the price. It is important to note that this is the consumer surplus if con-
suming one unit only. As an example, if consumer #1 above has a maximum willingness to
pay of $2.25 for one cup of coffee and the price is $1.00, the consumer surplus would be
$1.25 if consuming only one cup. However, we know that in many cases consumers have
individual price–​response functions showing the relation between quantity demanded
and price. Hence, also at the individual level, the consumer surplus is the difference
between the price–​response function for that consumer and the price charged for one
unit. This concept is illustrated in Figure 2.7.
20 Fundamentals of price theory

Shop Y
(cups/week)
Consumer surplus
10

Consumer surplus from

cup 3 and 4 consumed
6

Consumer surplus from

second cup consumed
4

Consumer surplus from

first cup consumed
2

0 Price Y
1.00 1.25 1.50 1.75 2.00 2.25 2.50 (per cup)

Figure 2.7 Consumer surplus for one given individual.

From this figure we see that for the first cup of coffee consumed the consumer surplus
is the difference between the maximum willingness to pay for the first cup, $2.50, and the
price of $1.00, which is equal to $1.50. For the second cup consumed the willingness to
pay is reduced to $2.00 and the consumer surplus for that cup is therefore $1.00. For the
next two cups the willingness to pay is $1.50 per cup (for both cups). Hence, the consumer
surplus for these two cups also equals $1.00 ( 2 x ($1.50 − $1.00 ) ). At a price of $1.00 per
cup, this consumer is demanding a total of eight cups. However, for the last four cups, the
willingness to pay is equal to the price and the consumer surplus for these cups is therefore
zero. The total consumer surplus for this consumer can be found by adding the surpluses
for all cups of coffee purchased:

1 × ($2.50 − $1.00 ) + 1 × ($2.00 − $1.00 ) + 2 × ($1.50 − $1.00 ) = $3.50

The concept of consumer surplus can easily be aggregated to reflect the total consumer
surplus of the customers of Shop Y. To illustrate, consider Figure 2.8 which depicts one
possible version of the aggregate price–​response function Shop Y is facing. Note that the
quantity demanded (Y-​axis) is now in 1,000s of cups. The price charged by Shop Y for one
cup of black coffee is still $1.00. The price–​response function shows that the maximum
willingness to pay for one cup of black coffee among all Shop Y’s customers is $3.00 (the
point where the price–​response function crosses the X-​axis) and that a total of 8,000 cups
is demanded at a price of $1.00 per cup. The aggregated difference between price and the
 Fundamentals of price theory 21

Shop Y
(1000 cups/week)
Aggregate
Consumer surplus
10

8
Price-
response
6 function
Shop Y

0
Price Y
1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 (per cup)

Figure 2.8 Aggregate consumer surplus.

consumer’s willingness to pay will thus be reflected in the area below the price–​response
function and above the price level charged by Shop Y for one cup. We shall return to how
businesses can use price differentiation to keep more of the aggregate consumer surplus
in the next chapter.
We now have a basic understanding of the fundamental economic theory involved in
explaining how price–​response functions are formed. Companies wanting to maximize
their total profit accruing from selling a given product or service also needs a thorough
understanding of their own costs associated with producing, or offering, the product
or service to the market. As costs are crucial inputs in any optimization model aimed
at finding the profit-​maximizing price, we devote the next section to gaining a better
understanding of the costs that matter in pricing decisions.

2.2 Costs that matter in pricing decisions

Put simply; the costs that really matters to a pricing and revenue manager are the incre-
mental costs associated with one additional unit sold of the product or service offered.
If the revenue from selling that unit exceeds the costs, we should offer it to the market.
If the opposite is true, we should not offer it to the market. This concept of marginal
costs and revenues lies at the heart of all pricing decisions. To calculate the marginal
costs (MC), we need to know what the total cost function looks like. In Equation (1.1)
in Chapter 1 the profit function was presented. The last two terms in this equation
represent the total costs accruing from the number of items produced of the product or
service of interest:

TC = cv v + c f
(2.2)
22 Fundamentals of price theory

where v is the number of items produced (or alternatively sold, i.e. the volume), cv is the
variable unit costs and cf is the fixed costs. We shall describe these cost components next
and link them to the concept of MC.

Fixed costs (c f)
In the short term, the fixed costs (cf) do not vary with the level of output. Consider again
a given coffee shop. To keep the shop open it needs: (1) electricity for heating/​cooling,
(2) insurance, (3) maintenance of buildings and inventory, and (4) a minimum number
of employees just to keep the shop open. All these costs run, even if there are zero
customers on a given day. Hence, going from zero to one customer induces no change in
the fixed costs. If the costs associated with keeping the shop open and running were all
fixed, the MC associated with one extra customer would be zero.

Variable costs (c v)
Variable costs (cv) vary with output. The easiest example is costs associated with raw
materials used to produce the final product. Examples of variable costs for the coffee
shop are costs related to the electricity used to keep the various coffee machines running
and, obviously, the coffee, milk, sugar, and other raw materials going into the final
products they sell. The total variable costs are given by the level of the output (volume)
times the cv per unit (number of cups sold in the coffee shop example).

Fixed, variable, or sunk costs?

Whether a given cost is fixed or variable depends on the time horizon used. In the
very long run, nearly all costs are variable. The coffee shop, for example, could decide
to reduce or increase the general level of activity in the shop by shutting down and
restarting specific coffee machines. In this case, the number of employees needed to
keep the shop open would vary. The same goes for electricity and potentially also insur-
ance and maintenance. However, decisions about how many different coffee machines,
and hence what menu is available to customers, should not be made on a day-​to-​day
basis. These decisions need to be part of a longer-​term plan. Even though the fixed costs
can vary, they are not usually referred to as variable costs, but rather incremental fixed
costs. The idea is that the fixed costs are fixed within some general levels of activity. The
coffee shop, for example, could have a general staff level of five for from 0 to 1,000 daily
customers. For higher levels of daily visitors than this, an additional five employees must
be hired to keep customers sufficiently satisfied.
The labeling of fixed, incremental fixed, or variable costs is not that important if
the price managers have accurate descriptions of the total costs (TC) function. What
is important, though, is to leave out costs that have no impact on pricing decisions at
all. Expenditures related to getting the business up and running in the first place are
examples of such costs that should be left out of the TC function. These are referred to
as sunk costs in the literature, because they cannot be recovered in any way when they
have been incurred. For the coffee shop, an expenditure of $10,000 for a new and very
fancy coffee machine is an example of a sunk cost. Once the decision is made to invest in
 Fundamentals of price theory 23

the new machine, these costs cannot be recovered and should be ignored in any forward-​
looking operational decision, including pricing decisions. Most of the fixed costs, on the
other hand, can be avoided if the coffee shop shuts down the coffee machines, the lights,
and the heating/​cooling, and closes the door. In most cases, the fixed costs are not rele-
vant in pricing decisions. The reason why, and the exceptions, will become clear when
we define MC next.

Marginal costs
The MC is the change in the TC function when increasing output with one unit. Formally,
this can be expressed like this:

∆TC
MC = (2.3)
∆Q

The MC is the increase in costs associated with expanding output with one unit. Hence,
∆Q = 1. In the economic literature the quantity given in Equation (2.3) is sometimes
referred to as incremental costs. One could argue that VC could have been used instead
of TC in the numerator. Why? Because fixed costs are fixed and will induce no change
in TC if output is expanded whatsoever. But remember that fixed costs could be incre-
mental. In this case, the use of VC in the numerator would simply be wrong. To further
illustrate this, consider Figure 2.9.
In this figure, three possible shapes of total cost curves (left panel) and corresponding
marginal costs (right panel) are illustrated. In the upper panel, we have fixed costs of
$4,000.000 and variable unit costs that are constant for all output levels. By examining
the slope of the TC function, we can easily calculate the variable unit costs. The TC
increase from $4 to $6 when output is increased from 0 to 2,000 units. This means that
the variable unit cost is (6 ′′ − 4 ′′ ) / 2, 000 = 1, 000 . In this case, the MC associated with
selling one more unit of the product or service of interest will induce a MC of $1,000
for all output levels. This is reflected in the upper right panel. Hence, the revenues must
exceed this number if the company is to profit from selling it. The fixed costs can be
ignored in the pricing decision here, because they do not alter the basic shape of the TC
function –​they are constant across all output levels.
The middle panel of Figure 2.9 illustrates a situation with incremental fixed costs and
constant variable unit costs. For output levels between 0 and 2,000 units, the fixed costs
are $2,000.000. An output level higher than this (2,000+ units) induces some additional
fixed costs of $2,000.000. As the variable unit costs are constant across all output levels,
the slope of the TC function does not change anywhere, except for the one vertical jump
where the fixed costs reach the higher level. However, as the TC function makes a jump
at 2,000 units, the profit function will experience a kink at the same output level. This
means that the fixed costs cannot be ignored in the pricing decision. In this case, the full
TC function should be specified (maybe with an =IF-​function) and used when searching
for the optimal price.
The lower panel of Figure 2.9 illustrates a situation with fixed costs of $4,000.000 and
variable unit costs that vary with output level. For low levels of output the variable unit
24 Fundamentals of price theory

Total Costs Marginal Costs

(TC) (MC)

10’’ TC 2500

8’’ 2000

6’’ 1500

4’’ 1000 MC

2’’ 500

0 Output 0 Output
1000 2000 3000 4000 5000 (volume) 1000 2000 3000 4000 5000 (volume)

Total Costs Marginal Costs

(TC) (MC)

10’’ TC 3’’

8’’ 2’’

6’’ 1’’

4’’ 1000 MC

2’’ 500

0 Output 0 Output
1000 2000 3000 4000 5000 (volume) 1000 2000 3000 4000 5000 (volume)

Total Costs Marginal Costs

(TC) (MC)

10’’
TC 2500 MC

8’’ 2000

6’’ 1500

4’’ 1000

2’’ 500

0 Output 0 Output
1000 2000 3000 4000 5000 (volume) 1000 2000 3000 4000 5000 (volume)

Figure 2.9 Possible shapes of total cost curves. Total costs (TC) in left panel and corresponding mar-
ginal costs (MC) in right panel. Upper panel: fixed costs of $4,000.000 and constant variable
costs of $1,000.00 per unit across all output levels. Middle panel: fixed costs of $2,000.000
for output levels between 0 and 2,000, then the fixed costs increase by $2,000.000 for output
levels of 2,000 or more. Constant variable costs of $1,000 per unit across all output levels.
Lower panel: Fixed costs of $4,000.000 and variable unit costs that vary with output level.
 Fundamentals of price theory 25

costs are high (steep slope of TC function), then they decrease as the company becomes
more efficient at higher production levels. At approximately 2,500 units of output, the
variable unit costs increase again. This shape of the TC function is the most commonly
used in economics textbooks to illustrate how the various cost curves for a firm may look
like across output levels.
You should note that there are many other possible shapes of cost curves than
those presented in Figure 2.9. In most cases you would probably have to do your own
estimations based on information from various sources to accurately describe the TC
function of the product or service you are building a pricing model for. It is beyond the
scope of this book to go far into the details of estimating cost functions from accounting
data and other relevant sources. We first and foremost focus on implementing an already
estimated TC function. It is still important that you are aware of the importance of
accurately describing the costs associated with producing/​selling the product or service
of interest to avoid unnecessary errors or omissions in the subsequent pricing analyses.
Next, we shall see how a firm can decide the optimal price based on information about
the price–​response function and the costs it faces. This will be illustrated with a simple
example. In later chapters, we shall build on this insight to solve more complex problems.

2.3 Deciding optimal price and quantity –​ an example

A fundamental assumption in economic analyses of firms’ decision-​making is that they
seek to maximize the profit accruing from selling the product or service of interest. In
Chapter 1, the profit function was defined as:

Z = pv − cv v − c f (2.4)

where p is the price v is the number of items sold (volume), and cv and c f are still the
variable unit and fixed costs. The firm’s objective is then to find the price for which this
function is maximized. We shall illustrate how this can be done by walking through a
simple example and link it to the topics of the previous two sections.
The golden rule that applies to any firm aiming for profit maximization is to set a
price, or alternatively produce a quantity of the product or service of interest, such
that the marginal revenue (MR) from selling one more unit equals MC. In less tech-
nical terms, this implies that in deciding whether to increase output by one more unit,
the firm should produce an additional unit if it can increase its revenues by more than
it costs to produce the unit. If the unit cost exceeds the additional revenue generated,
production and subsequent sale of that unit should not be implemented. Consider the
following table of two price levels and the number of units sold for a given company
selling a widget:

Price Units sold Revenue

$10.25 10 $102.50
$10.00 11 $110.00
26 Fundamentals of price theory

What is the MR in this case? It is simple: by charging a price of $10.00 instead of $10.25 the
company sells 11 units instead of ten units and earns an extra $7.50 ($110.00−$102.50).
This MR consists of one price element and one quantity element. The quantity element
consists of the extra revenue earned due to one more unit sold and equals $10.00 (10.00 × 1).
The price element is calculated assuming that we sell all units at the lower price. In our
case, this means that we lose $0.25 on the ten units that we previously could sell for
$10.25 and thus the total price element is ( $10.00 − $10.25 ) × 10 = −$2.50. Consequently,
the total change in revenue is $7.50 ($10.00 − $2.50 = $7.50 ).
If the costs associated with increasing production/​sales from ten to 11 units do not
exceed $7.50, the company should lower the price to sell the additional unit. Furthermore,
it should keep lowering the price until the MR is exactly equal to the MC. Why stop
exactly there? Because if it lowers the price more than this the firm will start losing
money on each item it sells when compared to the optimal (profit-​maximizing) price.
The above example, expanded to include more prices and units sold, is given in
Table 2.2 and Figure 2.10. We use fixed costs of $50.00 and variable unit costs of $1.00.

Table 2.2 Example marginal revenue, marginal costs and optimal produced quantity for the company
selling the widget

Price Units sold Revenue Marginal FC VUC TC Marginal Profit

revenue cost
12.50 1 12.50 50.00 1.00 51.00 –​38.50
12.25 2 24.50 12.00 50.00 1.00 52.00 1.00 –​27.50
12.00 3 36.00 11.50 50.00 1.00 53.00 1.00 –​17.00
11.75 4 47.00 11.00 50.00 1.00 54.00 1.00 –​7.00
11.50 5 57.50 10.50 50.00 1.00 55.00 1.00 2.50
11.25 6 67.50 10.00 50.00 1.00 56.00 1.00 11.50
11.00 7 77.00 9.50 50.00 1.00 57.00 1.00 20.00
10.75 8 86.00 9.00 50.00 1.00 58.00 1.00 28.00
10.50 9 94.50 8.50 50.00 1.00 59.00 1.00 35.50
10.25 10 102.50 8.00 50.00 1.00 60.00 1.00 42.50
10.00 11 110.00 7.50 50.00 1.00 61.00 1.00 49.00
9.75 12 117.00 7.00 50.00 1.00 62.00 1.00 55.00
9.50 13 123.50 6.50 50.00 1.00 63.00 1.00 60.50
9.25 14 129.50 6.00 50.00 1.00 64.00 1.00 65.50
9.00 15 135.00 5.50 50.00 1.00 65.00 1.00 70.00
8.75 16 140.00 5.00 50.00 1.00 66.00 1.00 74.00
8.50 17 144.50 4.50 50.00 1.00 67.00 1.00 77.50
8.25 18 148.50 4.00 50.00 1.00 68.00 1.00 80.50
8.00 19 152.00 3.50 50.00 1.00 69.00 1.00 83.00
7.75 20 155.00 3.00 50.00 1.00 70.00 1.00 85.00
7.50 21 157.50 2.50 50.00 1.00 71.00 1.00 86.50
7.25 22 159.50 2.00 50.00 1.00 72.00 1.00 87.50
7.00 23 161.00 1.50 50.00 1.00 73.00 1.00 88.00
6.75 24 162.00 1.00 50.00 1.00 74.00 1.00 88.00
6.50 25 162.50 0.50 50.00 1.00 75.00 1.00 87.50
6.25 26 162.50 0.00 50.00 1.00 76.00 1.00 86.50
6.00 27 162.00 –0.50 50.00 1.00 77.00 1.00 85.00
5.75 28 161.00 –1.00 50.00 1.00 78.00 1.00 83.00
5.50 29 159.50 –1.50 50.00 1.00 79.00 1.00 80.50
5.25 30 157.50 –2.00 50.00 1.00 80.00 1.00 77.50
 Fundamentals of price theory 27

100.00 15.00

80.00
10.00
60.00

40.00
5.00
20.00

MR and MC
Profit

0.00 0.00

-20.00
0 4 8 12 16 20 24 28 32 36 40 44 48 -5.00
-40.00

-60.00
-10.00
-80.00

-100.00 -15.00
Units sold

Marginal cost Profit Marginal Revenue

Figure 2.10 Graphical illustration of marginal revenue (MR), marginal cost (MC) and total profit as a
function of units sold.

As we can see, the optimal price is found exactly where the MR equals the MC. The
total demanded quantity when setting the price to $7.25 is 22 units, yielding a profit of
$87.50. If lowering the price to $7.00 or $6.75, the demanded quantity increases to 23
and 24 cups, respectively. Both these prices yield a total profit of $88.00. This means that
the optimal price is between $7.00 and $6.75. This is further confirmed when examining
the MR. When increasing output from 22 to 23 units, the MR is $1.50 and exactly $1.00
when going from the 23 to 24 units sold. As the MC is $1.00 (fixed for all demand levels),
we know that the optimal (profit-​maximizing) price is between $7.00 and $6.75 as this is
where the MR is exactly equal to the MC of $1.00. This can also be seen in Figure 2.10.
The profit function (the short-​dashed curve in the figure) reaches its maximum at 23/​24
units where the MR (solid black line) is equal to the MC (gray bars). The exact optimal
(profit-​maximizing) price can also be found analytically. We shall show how this can be
done in Chapter 7.
Note that in the microeconomic literature, the concepts of MR and MC are always
related to the extra revenues or costs associated with increasing output with one unit.
The decision problem is then essentially to figure out the optimal quantity to sell or
produce, not the optimal price. Traditionally, the theoretical models focus on how much
should the firm produce to maximize profit. From a price-​setting perspective, however, it
makes more sense to talk about MR as the extra revenue the firm could achieve from
a small price increase instead of increase in output. The example we have just walked
you through could just as easily have had a price focus. In Table 2.3 and Figure 2.11, the
MR is calculated as the additional revenue the firm would achieve from increasing the
price by $0.25 at the time. Even though the levels of MR are different compared to when
28 Fundamentals of price theory

Table 2.3 Example marginal revenue, marginal costs, and optimal price for the company selling
the widget

Price Units sold Revenue Marginal FC VUC TC Marginal Profit

revenue cost
5.00 31 155.00 3.00 50.00 1.00 81.00 -​1.00 74.00
5.25 30 157.50 2.50 50.00 1.00 80.00 -​1.00 77.50
5.50 29 159.50 2.00 50.00 1.00 79.00 -​1.00 80.50
5.75 28 161.00 1.50 50.00 1.00 78.00 -​1.00 83.00
6.00 27 162.00 1.00 50.00 1.00 77.00 -​1.00 85.00
6.25 26 162.50 0.50 50.00 1.00 76.00 -​1.00 86.50
6.50 25 162.50 0.00 50.00 1.00 75.00 -​1.00 87.50
6.75 24 162.00 -​0.50 50.00 1.00 74.00 -​1.00 88.00
7.00 23 161.00 -​1.00 50.00 1.00 73.00 -​1.00 88.00
7.25 22 159.50 -​1.50 50.00 1.00 72.00 -​1.00 87.50
7.50 21 157.50 -​2.00 50.00 1.00 71.00 -​1.00 86.50
7.75 20 155.00 -​2.50 50.00 1.00 70.00 -​1.00 85.00
8.00 19 152.00 -​3.00 50.00 1.00 69.00 -​1.00 83.00
8.25 18 148.50 -​3.50 50.00 1.00 68.00 -​1.00 80.50
8.50 17 144.50 -​4.00 50.00 1.00 67.00 -​1.00 77.50
8.75 16 140.00 -​4.50 50.00 1.00 66.00 -​1.00 74.00
9.00 15 135.00 -​5.00 50.00 1.00 65.00 -​1.00 70.00
9.25 14 129.50 -​5.50 50.00 1.00 64.00 -​1.00 65.50
9.50 13 123.50 -​6.00 50.00 1.00 63.00 -​1.00 60.50

100.00 15.00

10.00
50.00

5.00
0.00
MR and MC
Profit

0.00

-50.00
0.00
0.75
1.50
2.25
3.00
3.75
4.50
5.25
6.00
6.75
7.50
8.25
9.00
9.75
10.50
11.25
12.00
12.75
13.50

-5.00

-100.00
-10.00

-150.00 -15.00
Price

Marginal cost Profit Marginal Revenue

Figure 2.11 Graphical illustration of marginal revenue (MR), marginal cost (MC) and total profit as a
function of units sold.
 Fundamentals of price theory 29

selling an additional unit, the conclusion is the same: set a price of between $6.75 and
$7.00 to maximize profit. This price will again lead to a demanded quantity of 23 to 24
and a total profit of ~$88.00. Note the asymmetric shape of the profit function. When
the price level reach $13.00 demands drop to zero. Increasing the price further induces
no change in quantity demanded, and the revenues and variable costs are zero.

Optimal price in the case of incremental fixed costs

When the cost function consists of stepwise or incremental fixed costs for various output
levels, the golden rule of setting the price such that MR=MC does not necessarily apply.
The reason is that in such cases, the shape of the total cost and profit function will
be altered and could, in turn, affect the optimal produced quantity (or alternatively
the optimal price). To illustrate this, consider Figures 2.12 and 2.13 below. In both
illustrations the widget producer experiences a jump in fixed costs when producing 12
units or more. In the first case (Figure 2.12), the fixed costs increase from $50.00 to
$75.00. This is reflected in the figure in two ways. First, the MC when increasing output
from 11 to 12 units is $26.00. Second, the profit function exhibits a distinct kink for the
same output level. However, the maximum profit is still reached at an output of 23 to
24 units, which can be achieved by setting a price of between $6.75 and $7.00, as seen in
the figure.
The situation in Figure 2.13 is different. In this case, the fixed costs jump from $50.00
to $100.00 when output increases from 11 to 12 units. The increase in the fixed costs
is now so big that the previously found optimal output level (where MR=MC: ~23/​24
units) induces a lower profit level compared with a production level of 11 units where the

80.00 30.00
60.00 25.00
40.00
20.00
20.00
15.00
0.00
MR and MC

-20.00 10.00
Profit

-40.00 5.00
-60.00
0.00
-80.00
-5.00
-100.00
0 4 8 12 16 20 24 28 32 36 40 44 48 -10.00
-120.00
-140.00 -15.00
Units sold

Marginal cost Profit Marginal Revenue

Figure 2.12 Graphical illustration of marginal revenue (MR), marginal cost (MC) and total profit as a
function of units sold in the case of incremental fixed costs.
Other documents randomly have
different content
The Project Gutenberg eBook of Historical
Record of the Fifth Regiment of Foot, or
Northumberland Fusiliers
 This ebook is for the use of anyone anywhere in the United
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Title: Historical Record of the Fifth Regiment of Foot, or

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*** START OF THE PROJECT GUTENBERG EBOOK HISTORICAL

RECORD OF THE FIFTH REGIMENT OF FOOT, OR
NORTHUMBERLAND FUSILIERS ***
TRANSCRIBER'S NOTE
Some minor changes are noted at the end of the book.
 HISTORICAL RECORDS

OF THE

BRITISH ARMY.

PREPARED FOR PUBLICATION UNDER THE DIRECTION OF THE

ADJUTANT-GENERAL.

THE FIFTH REGIMENT OF FOOT;

OR,

NORTHUMBERLAND FUSILIERS.
 LONDON:
Printed by William Clowes and Sons
14, Charing Cross.
 GENERAL ORDERS.

HORSE-GUARDS,
1st January, 1836.
His Majesty has been pleased to command, that, with a view
of doing the fullest justice to Regiments, as well as to Individuals
who have distinguished themselves by their Bravery in Action with
the Enemy, an Account of the Services of every Regiment in the
British Army shall be published under the superintendence and
direction of the Adjutant-General; and that this Account shall contain
the following particulars, viz.,

—— The Period and Circumstances of the Original Formation of

the Regiment; The Stations at which it has been from time to
time employed; The Battles, Sieges, and other Military
Operations, in which it has been engaged, particularly specifying
any Achievement it may have performed, and the Colours,
Trophies, &c., it may have captured from the Enemy,
—— The Names of the Officers and the number of Non-
Commissioned Officers and Privates, Killed or Wounded by the
Enemy, specifying the Place and Date of the Action.
—— The Names of those Officers, who, in consideration of their
Gallant Services and Meritorious Conduct in Engagements with
the Enemy, have been distinguished with Titles, Medals, or other
Marks of His Majesty's gracious favour.
—— The Names of all such Officers, Non-Commissioned
Officers and Privates as may have specially signalized themselves
in Action.
 And,
—— The Badges and Devices which the Regiment may have
been permitted to bear, and the Causes on account of which such
Badges or Devices, or any other Marks of Distinction, have been
granted.

By Command of the Right Honourable

GENERAL LORD HILL,
Commanding-in-Chief.

John MacDonald,
Adjutant-General.
 P R E FA C E .

The character and credit of the British Army must chiefly depend
upon the zeal and ardour, by which all who enter into its service are
animated, and consequently it is of the highest importance that any
measure calculated to excite the spirit of emulation, by which alone
great and gallant actions are achieved, should be adopted.
Nothing can more fully tend to the accomplishment of this
desirable object, than a full display of the noble deeds with which
the Military History of our country abounds. To hold forth these
bright examples, to the imitation of the youthful soldier, and thus to
incite him to emulate the meritorious conduct of those who have
preceded him in their honourable career, are among the motives that
have given rise to the present publication.
The operations of the British Troops are, indeed, announced in the
'London Gazette,' from whence they are transferred into the public
prints: the achievements of our armies are thus made known at the
time of their occurrence, and receive the tribute of praise and
admiration to which they are entitled. On extraordinary occasions,
the Houses of Parliament have been in the habit of conferring on the
Commanders, and the Officers and Troops acting under their orders,
expressions of approbation and of thanks for their skill and bravery,
and these testimonials, confirmed by the high honour of their
Sovereign's Approbation, constitute the reward which the soldier
most highly prizes.
It has not, however, until late years, been the practice (which
appears to have long prevailed in some of the Continental armies)
for British Regiments to keep regular records of their services and
achievements. Hence some difficulty has been experienced in
obtaining, particularly from the old Regiments, an authentic account
of their origin and subsequent services.
This defect will now be remedied, in consequence of His Majesty
having been pleased to command, that every Regiment shall in
future keep a full and ample record of its services at home and
abroad.
From the materials thus collected, the country will henceforth
derive information as to the difficulties and privations which chequer
the career of those who embrace the military profession. In Great
Britain, where so large a number of persons are devoted to the
active concerns of agriculture, manufactures, and commerce, and
where these pursuits have, for so long a period, been undisturbed by
the presence of war, which few other countries have escaped,
comparatively little is known of the vicissitudes of active service, and
of the casualties of climate, to which, even during peace, the British
Troops are exposed in every part of the globe, with little or no
interval of repose.
In their tranquil enjoyment of the blessings which the country
derives from the industry and the enterprise of the agriculturist and
the trader, its happy inhabitants may be supposed not often to
reflect on the perilous duties of the soldier and the sailor,—on their
sufferings,—and on the sacrifice of valuable life, by which so many
national benefits are obtained and preserved.
The conduct of the British Troops, their valour, and endurance,
have shone conspicuously under great and trying difficulties; and
their character has been established in Continental warfare by the
irresistible spirit with which they have effected debarkations in spite
of the most formidable opposition, and by the gallantry and
steadiness with which they have maintained their advantages
against superior numbers.
In the official Reports made by the respective Commanders, ample
justice has generally been done to the gallant exertions of the Corps
employed; but the details of their services, and of acts of individual
bravery, can only be fully given in the Annals of the various
Regiments.
These Records are now preparing for publication, under His
Majesty's special authority, by Mr. Richard Cannon, Principal Clerk of
the Adjutant-General's Office; and while the perusal of them cannot
fail to be useful and interesting to military men of every rank, it is
considered that they will also afford entertainment and information
to the general reader, particularly to those who may have served in
the Army, or who have relatives in the Service.
There exists in the breasts of most of those who have served, or
are serving, in the Army, an Esprit du Corps—an attachment to every
thing belonging to their Regiment; to such persons a narrative of the
services of their own Corps cannot fail to prove interesting.
Authentic accounts of the actions of the great,—the valiant,—the
loyal, have always been of paramount interest with a brave and
civilized people. Great Britain has produced a race of heroes who, in
moments of danger and terror, have stood, "firm as the rocks of
their native shore;" and when half the World has been arrayed
against them, they have fought the battles of their Country with
unshaken fortitude. It is presumed that a record of achievements in
war,—victories so complete and surprising, gained by our
countrymen,—our brothers—our fellow-citizens in arms,—a record
which revives the memory of the brave, and brings their gallant
deeds before us, will certainly prove acceptable to the public.
Biographical memoirs of the Colonels and other distinguished
Officers, will be introduced in the Records of their respective
Regiments, and the Honorary Distinctions which have, from time to
time, been conferred upon each Regiment, as testifying the value
and importance of its services, will be faithfully set forth.
As a convenient mode of Publication, the Record of each Regiment
will be printed in a distinct number, so that when the whole shall be
completed, the Parts may be bound up in numerical succession.
FIFTH REGIMENT OF FOOT (NORTHUMBERLAND FUSILIERS).
[To face page 1.
 HISTORICAL RECORD

OF THE

FIFTH REGIMENT OF FOOT,

OR

NORTHUMBERLAND FUSILIERS;

CONTAINING

AN ACCOUNT OF THE FORMATION OF THE REGIMENT

IN THE YEAR 1674,
AND OF ITS SUBSEQUENT SERVICES
TO 1837.

PREPARED FOR PUBLICATION UNDER THE DIRECTION

OF THE ADJUTANT-GENERAL.
 LONDON:
PRINTED BY W. CLOWES AND SONS, 14, CHARING-CROSS.

MDCCCXXXVIII.
 THE

FIFTH REGIMENT OF FOOT,

OR

NORTHUMBERLAND FUSILIERS,
BEARS ON ITS COLOURS

"ST. GEORGE and the DRAGON,"

WITH THE MOTTO,

"QUO FATA VOCANT,"

AND THE FOLLOWING DISTINCTIONS:

"Wilhelmsthal" —"Roleia" —"Vimiera" —"Corunna"

—"Busaco" —"Ciudad Rodrigo" —"Badajoz"
—"Salamanca" —"Vittoria" —"Nivelle" —"Orthes"
—"Toulouse" —"Peninsula."
 CONTENTS.

Anno Page
1674 The Dutch Government obtains permission to entertain British
Troops in its service 1
—— Ten Companies formed—the siege of Grave 2
—— The Fifth, and three other regiments, formed —
1676 Siege of Maastricht 3
1677 Battle of Mont-Cassel 7
1678 Battle of St. Denis —
1685 The Regiment proceeds to England 10
—— Returns to Holland 11
1688 Accompanies the Prince of Orange to England 12
—— Revolution—Placed on the English Establishment 14
1690 Proceeds to Ireland —
—— Battle of the Boyne 15
1691 Skirmish near Castle-Cuff, &c. —
—— Siege of Athlone 17
—— Siege of Limerick 18
—— Returns to England —
1692 Proceeds to Flanders —
—— Returns to England 19
1693 Expedition to Martinico —
—— Returns to England —
—— Proceeds to Flanders —
1695 Covering the siege of Namur 20
1697 Returns to England 22
1698 Proceeds to Ireland —
1707 Embarks for Portugal —
1709 Battle of Caya 24
1710 Capture of Xeres de los Cabaleros 25
1713 Embarks for Gibraltar 27
1727 Defence of Gibraltar —
1728 Proceeds to Ireland 28
1735 Embarks for England —
1737 Returns to Ireland 29
1755 Proceeds to England —
1758 Expedition to the Coast of France—destruction of Shipping, &c.,
at St. Maloes —
—— Capture of Cherbourg, &c.—Returns to England 30
1760 Proceeds to Germany —
—— Skirmish at Corbach 31
—— Battle of Warbourg —
—— Surprise at Zirenberg 32
—— Skirmish at Campen —
1761 Battle of Kirch-Denkern —
—— Affair at Capelnhagen 33
—— Skirmish at Eimbeck —
—— Skirmish at Foorwohle —
1762 Battle of Groebenstien, &c. —
—— Skirmish at Lutterberg 36
—— Skirmish at Homburg —
—— Covering the siege of Cassel —
1763 Marches through Holland and embarks for England —
—— Proceeds to Ireland 37
1767 The "Order of Merit" introduced —
1771 Suppression of disturbances in Ireland 39
1774 Embarks for Boston in North America —
1775 Affair at Concord and Lexington 40
—— Attack on Bunker's Hill 42
1776 Embarks from Boston for Nova Scotia 44
—— Reduction of Long Island —
—— Action at White Plains 45
1776 Capture of Forts Washington and Lee 45
—— Reduction of New Jersey —
1777 Expedition to Pennsylvania—actions at Brandywine Creek and
Germantown 46
1778 Retreat through the Jerseys—skirmish at Freehold 48
—— Expedition to Little Egg Harbour —
—— Reduction of the Island of St. Lucie 49
—— The men equipped with White Plumes 51
1779}
In various actions in the West Indies —
1780}
1780 Proceeds to England 51
1781 Embarks for Ireland 52
1787 Proceeds to Canada 54
1797 Returns to England 56
1799 Second battalion formed—both battalions embark for Holland —
—— Action at Walmenhuysen, Shoreldam, and Egmont-op-Zee 57
—— Action at Winkle 58
—— Returns to England —
1800 Proceeds to Gibraltar 59
1802 Returns to England—Second battalion disbanded —
1803 Proceeds to Guernsey —
1804 Returns to England—a Second battalion raised —
1805 Second battalion to Guernsey—First battalion embarks for
Hanover —
1806 First battalion returns to England—embarks for South America 60
1807 Attack on Buenos Ayres —
—— Both battalions proceed to Ireland 61
1808 First battalion embarks for Portugal —
—— —————– Battle of Roleia 62
—— —————– Battle of Vimiera —
—— —————– Advances into Spain—Retreats to the coast 63
1809 First battalion, battle of Corunna 63
—— —————— Returns to England—proceeds on the Walcheren
expedition 64
—— First battalion returns to England 65
—— —————– Detachment at the battle of Talavera —
—— Second battalion from Ireland to Portugal —
1810 ——————– Battle of Busaco—Lines of Torres Vedras 66
—— First battalion proceeds from England to Ireland —
1811 Second battalion, affair at Redinha 67
—— ——————— Battle of Sabugal —
—— ——————— Battle of Fuentes d'Onor 68
—— ——————— Siege of Badajoz —
—— ——————— Action at El Bodon —
1812 ——————— Siege of Ciudad Rodrigo 74
—— ——————— Siege of Badajoz 76
—— First battalion from Ireland to Portugal 78
—— Both battalions at the battle of Salamanca —
—— —————— advance to Madrid 79
—— Chivalrous spirit of James Grant —
—— Second battalion proceeds to England 80
—— First battalion retreats from Madrid to Portugal —
1813 —————– Battle of Vittoria 81
—— —————– Battle of the Pyrenees 82
—— —————– Enters France—battle of Nivelle —
—— —————– Passage of the Nive —
1814 —————– Affair near the Gave d'Oleron 83
—— —————– Battle of Orthes —
—— —————– Battle of Toulouse —
—— —————– Embarks for North America 84
—— —————– Action near Plattsburg —
1815 —————– Proceeds from America to Flanders 85
—— —————– Advances to Paris —
—— —————– Forms part of the Army of Occupation in France —
1818 First battalion proceeds to England 85
—— Reduced to one battalion in 1816 86
—— Proceeds to the West Indies —
1821 Reduced from ten to eight companies —
1824 Privilege of wearing a distinguishing feather confirmed 87
1825 Augmented from eight to ten companies —
1826 Embarks for England —
1827 Proceeds to Ireland 88
1829 To wear a red and white feather 90
1830 Good conduct during the Galway election 91
1831 Six companies embark for Gibraltar, and four companies remain
in Ireland 95
1832 The "Order of Merit" sanctioned 96
1833 Colours destroyed by fire 97
1834 Service companies from Gibraltar to Malta 98
—— Facings changed to a lively green 99
1835 Correspondence relative to an additional banner 100
—— The reserve companies proceed to England 101
1836 Equipped as Fusiliers, and styled the Fifth Regiment of Foot, or
Northumberland Fusiliers —
—— "Wilhelmsthal" inscribed on the Colours 102
—— New Colours presented to the regiment 103
1837 Service companies proceed to Corfu 106
—— The Conclusion —

PLATES.
The Vignette—Badge—to follow Title Page
The Colours to face Page 1
The Uniform of 1688 to face Page 12
The Uniform of 1835 to face 100
The Uniform of 1837 to face 106
 SUCCESSION OF COLONELS.

Anno Page
1674 Daniel Viscount of Clare 107
1675 John Fenwick 108
1676 Henry Wisely —
1680 Thomas Monk 109
1688 Thomas Tollemache —
1689 Edward Lloyd 110
1694 Thomas Fairfax —
1704 Thomas Pearce —
1732 John Cope 111
1737 Alexander Irwin 112
1752 Charles Whiteford —
1754 Lord George Bentinck 113
1759 Studholme Hodgson —
1768 Hugh Earl Percy 114
1784 Honourable Edward Stopford —
1794 Sir Alured Clarke, G.C.B. 115
1801 Richard England 116
1812 William Wynyard —
1819 Sir Henry Johnson, Bart., G.C.B. 117
1835 The Hon. Sir Charles Colville, G.C.B, and G.C.H. —
FIFTH REGIMENT OF FOOT (NORTHUMBERLAND FUSILIERS).
 HISTORICAL RECORD
OF THE

FIFTH REGIMENT OF FOOT,

OR

NORTHUMBERLAND FUSILIERS.

1674

When the treaty of peace between England and Holland was being
negotiated at London in February 1674,[1] the Dutch Government,
remembering the advantages which had been derived from the
Auxiliary British troops in former wars, obtained permission again to
entertain in its service certain regiments.
Peace having been concluded, King Charles II. disbanded part of
his army in the same year, when many of the officers and men
proceeded to Holland, and the formation of the British division was
commenced. The original design was to have a division of ten
thousand men, to be commanded-in-chief, under the Prince of
Orange, by Major-General Sir Walter Vane; but while the
organization of this force was in progress, Sir Walter was killed at
the battle of Seneffe, which was fought on the 11th of August, 1674;
and Sir William Ballandyne was appointed to succeed him in the
command of the British troops.
The formation making rapid progress, in the autumn, when the
Prince of Orange was besieging Grave in North Brabant, he was
informed that ten English and Irish companies, complete and fit for
service, were at Bois-le-Duc, about 18 miles distant, and his
Highness, eager to avail himself of their services, immediately
ordered them to join the army. In this siege the ten companies gave
presage of that gallantry for which they afterwards became
celebrated; they lost several men, and Sir William Ballandyne was
also killed by a cannon-ball.
The capture of Grave, which took place on the 28th of October,
terminated the campaign; the troops were sent into quarters; and
during the winter four regiments of British subjects were formed at
Bois-le-Duc;—two English,—one Scots,—and one Irish;—the latter is
now designated the Fifth Regiment of Foot, or Northumberland
Fusiliers, and its services form the subject of this narrative. Its first
Colonel was Daniel O'Brien, Viscount of Clare; but this nobleman
resigned soon afterwards, and quitted Holland. The regiment was
commanded, ad interim, by Lieutenant-Colonel Anselmne, who had
previously served with much honour in the Spanish service.

1675

In 1675 the command of this regiment was conferred on Colonel

John Fenwick, who had distinguished himself at the battle of
Seneffe; at this period the regiment discontinued the designation of
"Irish," and many English gentlemen received commissions in it.
After leaving its quarters at Bois-le-Duc in the spring of 1675, the
regiment was encamped for a short time on one of the beautiful
plains of Louvain, and it was subsequently employed in manœuvring
near the frontiers of France and in the Principality of Liege. The
progress of the campaign was impeded by the severe indisposition
of the Prince of Orange; no engagement of importance occurred,
and in the autumn the regiment marched to the Dutch Netherlands
and passed the winter in garrison at Utrecht.

1676

In the summer of 1676 the regiment marched to Brabant, and was

stationed at Bois-le-Duc, preparatory to some expedition of
importance. This occurred in the early part of July, and the men
were in high spirits, anticipating some splendid adventure. About
two o'clock in the morning the drums beat "to arms;" the regiment
immediately assembled at the alarm-post, and commenced its march
for the province of Limburg, being joined by other corps every day.
On the fifth day, the Prince of Orange appeared at the head of the
troops, and, to the surprise of the enemy, the famous city of
Maestricht was besieged. This city, which was well fortified with all
the works which art could suggest, was defended by 8000 chosen
men commanded by Monsieur Calvo, a resolute Catalonian. The
Prince of Orange attended to the progress of the siege; and after the
arrival of the battering train, the works were carried on with vigour.
The three English regiments[2] were formed in one Brigade, and
they soon distinguished themselves, beating back the sallies of the
garrison with great slaughter. On the 30th of July, a storming party
of two hundred men, furnished in equal proportions by the three
regiments, attacked the Dauphin Bastion, and after a severe contest
effected a lodgment, but afterwards lost their ground: this proved a
sanguinary affair, and 150 men were killed and wounded out of the
two hundred. On the 2nd of August the Brigade was again on duty
in the trenches, when Colonel Fenwick was wounded.
The Prince of Orange resolved to make a second attack on the
Dauphin Bastion on the 4th of August, when a detachment from the
Brigade, commanded by Captain Anthony Barnwell of Fenwick's
regiment, with another from the Dutch Foot Guards, commanded by
Baron Sparr, formed the storming party.[3] At three o'clock the
Brigade was under arms with the storming party in front; and at five
the gallant little band, advancing under a tempest of bullets, went
cheering to the attack and carried the bastion in gallant style—the
English, gaining the lead of the Dutch, first made a lodgment.
Scarcely, however, had the soldiers gained a footing, when the
French sprung a mine and blew many of the men into the air, and
following this up with a fierce attack, regained possession of the
works. The heroic English were, however, "resolute to win;"—they
returned to the attack, and fighting with a strength and majesty
which nothing could withstand, drove back the French, and re-
established themselves on the bastion; but their commander,
Captain Barnwell, was killed, and more than half the officers and
men of the party were killed and wounded.
About five in the morning of the 6th of August a desperate sally
was made by three hundred Swiss Infantry, and, owing to the
neglect of a sentry, they surprised and made prisoners the English
guard on the bastion; but a reinforcement from the Brigade came
forward to their rescue, and, after saluting the assailants with a few
volleys, and a shower of hand-grenades, made a furious charge,
retaking the bastion and chasing the Swiss Infantry with prodigious
slaughter to the palisadoes of the counterscarp, destroying the
whole detachment, except about twenty men who escaped into the
town. The Prince of Orange complimented the Brigade on its
distinguished bravery, and made each of the three regiments a
present of a fat ox and six sheep.[4]
On the 15th of August Colonel Fenwick's regiment, commanded by
Lieutenant-Colonel Wisely (the Colonel not having recovered from
his wounds) was on duty in the trenches, when the enemy made
another furious sally; but they were nobly received by the regiment;
a fierce combat ensued, in which the strength and unconquerable
spirit, of the English again excited the admiration of the Prince of
Orange, and a reinforcement arriving, the French were driven back
with great loss.
The progress of the siege had been marked by surprising energy,
but it was prolonged by the resolute defence of the garrison; and
when all things were ready for a general assault, a French army of
overwhelming numbers, commanded by Marshal Schomberg,
advanced to its relief. The Prince of Orange immediately raised the
siege and retired; and the three English regiments, having sustained
a severe loss, and having nearly half the number of the surviving
officers and men wounded, were sent into quarters of refreshment
in Holland. At the same time a misunderstanding occurred between
Colonel (afterwards Sir John) Fenwick and the Prince, and the
Colonel resigned his commission; when his Highness gave the
Colonelcy of the regiment to the Lieutenant-Colonel, Henry Wisely.

1677

The French, while amusing the Allies with negotiations for a

peace, commenced the campaign of 1677, with great vigour, and
with such an immense army, that the feeble preparations of the
Dutch, and the apathy of the Spaniards, left the Prince of Orange
without an army capable of resisting the enemy. He, however,
resolved to attempt the relief of St. Omers, which was besieged by
the French; the English Brigade was ordered to West Flanders, to
take part in the enterprise, and it was encamped a short time on the
plains of the Yperlee. In the early part of April, the Prince advanced
with his little army, and on the 11th of that month he fought the
battle of Mont-Cassel under great disadvantages in numbers, and in
the nature of the ground. The English Brigade behaved with its usual
gallantry; but the army was defeated, and the Prince retreated with
the loss of his baggage and artillery. The Brigade was afterwards
employed in manœuvring and in defensive operations until the
autumn, when it went into quarters. The Prince of Orange
proceeded to England, and was married to the Princess Mary on the
14th of November, 1677.

1678

Before the following spring, Major-General the Earl of Ossory

arrived from England to command the six British regiments in the
Dutch service, and ten thousand English troops, commanded by the
Duke of Monmouth, were ordered to proceed to Flanders to take
part in the war.
The Earl of Ossory's brigade was early in the field: it was
employed a short time on detached services in the Netherlands, and
was afterwards encamped near the ground where the battle of
Waterloo was fought in June, 1815. In the mean time the French
besieged Mons, the capital of the province of Hainault, and their