Chapter 12

Nonuniform pricing

Charging consumers different prices for the the same product or charging a single customer a price that depends on the number of units the customer buys

4. Multimarket price discrimination

Firms that cannot perfectly price discriminate may charge a group of consumers with relatively elastic demands a lower price than other groups of consumers.

3. Quantity discrimination

Some firms profit by charging different prices for large purchases than for small ones, which is a form of price discrimination.

Pure bundling

The customer cannot buy one product without the other. Pays of when there is a negative correlation

The three preconditions in order to price discriminate

1. A firm must have market power, otherwise, it cannot charge any consumer more than the competitive price. A monopoly, an oligopoly firm, a monopolistically competitive firm, or a cartel may be able to price discriminate. A competitive firm cannot price discriminate 2. Consumers must differ in their sensitivity to price (demand elasticities), and a firm must be able to identity how consumers differ in this sensitivity. The movie theater knows that college students and senior citizens differ in their willingess to pay for a ticket, and Disneyland knows that tourists have a higher willingness to pay than natives. 3. A firm must be able to prevent or limit resale to higher-price-paying customers by customers whom the firm charges relatively low prices.

The three types of price discrimination

1. Perfect price discrimination (first-degree price discrimination) - The firm sells each unit at the maximum amount any customer is willing to pay for it. 2. Quantity discrimination (second-degree price discrimination) - The firm charges a different price for large quantities than for small quantities, but all customers who buy the same quantity pays the same price. 3. Multimarket price (third-degree price discrimination) - The firm charges different groups of customers different prices, but it charges a given customer the same price for every unit of output sold.

Two-part tariff

A consumer pays a fee for the right to buy the good and another price for each unit purchased.

1. Why price price discriminate, and how?

A firm can increase its profit by price discriminating if it has market power, can identify which consumers are more price sensitive than others, and can prevent customers who pay low prices from reselling to those who pay high prices.

Perfect price discrimination

A firm knowing each customer willingness to pay, and selling for the

requirement tie-in sale

consumers who buy one product from a firm are required to make all their purchases of another product from that same firm.

Bundling

two goods are combined so that customers cannot buy either product without buying the other. e.g. a printer with inc included. A computer with windows installed.

7. Advertising

A monopoly advertises to shits its demand curve and to increase its profit.

5. Two-part tariffs

By charging consumers a fee for the right to buy any number of units and price per unit, firms earn higher profits than they do by charging a single price per unit.

6. Tie-in sales

By requiring a customer to buy a second good or service along with the first, firms make higher profits than they do by selling the goods or services separably.

2. Perfect price discrimination

If a monopoly can charge the maximum each customer is willing to pay for each unit of output, the monopoly captures all potential consumer surplus, and the efficient (competitive) level of output is sold.

Price discrimination

Practice in which a firm charges consumers different prices for the same good.

preventing resale

Resale is difficult for most services and when transaction costs are high. The higher the transaction costs a consumer must incur to resell a good, the less likely that resale will occur.

Two part tariffs

The firm charges a consumer a lump-sum fee (the first tariff) for the right to buy as many units of the good as the consumer wants at a specific price (the second tariff) For a firm to profit from a two-part tariff, the firm must have market power, and know how demand differs across customers or with the quantity that a single customer buys, and successfully prevent resale.

Two part tariff with identical customers

The firm charges a price, p, equal to the marginal cost, m=$10, for each item and a lump-sum fee equal to each consumer's surplus, CS=$2450

Mixed bundling

The firm offers the consumer to buy the products as a package, but also as separate units.

Lump-sum fee

The first tariff of a two-part tariff, which gives the customer the right to buy as many units the customer wants at a specific price. e.g. Health care, (pay for membership, and then pay for visits).

Reservation price

The maximum amount a person would be willing to pay for a unit of output. A firm which sells its units at each reservation price is practicing PERFECT PRICE DISCRIMINATION

Block-pricing

The monopoly charges a price of $70 for the first block (1-20), and 50 for the second block (21-40). A customer decides to buy 40 units and pays $1400 for the first block (20*$70=1400), and $1000 for the second block (20*$50=1000). The more block prices that the monopoly can set, the close the monopoly can get to perfect price discrimination.

Two part tariff with nonidentical consumers

The monopoly has two customers and can treat the differently. It maximizes its profit by setting p=m=$10 and charging consumer 1 a fee equal to its potential consumer surplus A1+B1+C1=$2450 and consumer 2 a fee of A2+B2+C2=$4050, for a total profit of $6500.

tie-in sale

Where a consumer may buy one good only if also agreeing to buy another good or service. e.g. vacations services (airline and housing)