chpt 11

Third-degree price discrimination is

the practice of charging different prices based on systematic differences in demand across demographic consumer groups

Second-degree price discrimination is

the practice of posting a discrete schedule of declining prices for different ranges of quantity

Methods for inducing brand loyalty.

- Advertising campaigns. - "Frequent-buyer" programs

Many of these strategies permit firms to earn profits that are greater than those of a single price monopolist

- Price discrimination - Two-part pricing - Block pricing - Commodity bundling - Peak-load pricing

HW Q: One of the conditions under which price discrimination is profitable is:

A. ability to identify consumer types. B. inability to resell the good. C. differences in demand elasticities. [D.] All of the statements associated with this question are correct.

4. You are the manager of We Trust, the only bank in a small town. Your boss has been studying a report on transaction volume and has noticed a troubling trend: We Trust does not have enough tellers to handle the bank's maximum capacity, which occurs during the lunch hour. Your boss has asked for a short report that summarizes alternative plans for solving this problem, the pros and cons of each plan, and your recommended course of action. Provide this report

Plan 1: having different lunch times for half the employees and different for another half. Pros: more tellers to handle rush hr, no extra cost for the bank cons: only half of the tellers would be available, employee resentment Plan 2: hire more tellers Pros: more tellers to handle rush hrs and no resentment Cons: increase in variable costs (labor) for bank and lower profits Choose plan 1, because we can rotate the tellers to reduce resentment, or move lunch time earlier or after the rush hr

HW Q: Cinemas sometimes give senior citizens discounts. What is the possible privately motivated purpose for them to do so?

Senior citizens have a more elastic demand for movies than ordinary citizens.

3. Most wholesalers post a "suggested retail price" on packages, which in turn are sold by retailers. Is there an economic basis for the suggested retail price? As the manager of a retailing outlet, what factors will determine whether you should charge the suggested retail price or some higher or lower price?

Yes, the suggested retail price is put on the product to guide the consumers as well as the retailers regarding what maximum retail price should be charged by the retailer and what price should be paid by the consumers. Factors: Profit margin of the product, availability of the product, brand loyalty, competition.

Peak-load pricing is

a pricing strategy in which higher prices are charged during peak hours than during off-peak hours.

Block pricing is

a pricing strategy in which identical products are packaged together in order to enhance profits by forcing customers to make an all-or-none decision to purchase

Two-part pricing is

a pricing strategy whereby a firm with market power charges a fixed fee for the right to purchase its goods, plus a per-unit charge for each unit purchased.

Firms with market power face a

downwardsloping demand.

price discrimination

is the practice of charging different prices to consumers for the same good or service

First-degree price discrimination

is the practice of charging each consumer the maximum price he or she would be willing to pay for each unit of the good purchased. -managers rarely know each consumers' maximum willingness to pay for each unit of the product

First degree price discrimination, block pricing, and two part pricing permit a firm to

extract all consumer surplus.

Commodity bundling, second-degree and third degree price discrimination permit a firm to

extract some (but not all) consumer surplus.

Price matching is a

strategy in which a firm advertises a price and a promise to match any lower price offered by a competitor. - If all firms in the market adopt a price matching policy, all firms can set the monopoly price and earn monopoly profits; instead of the zero profits it would earn in the usual one-shot Bertrand oligopoly.

Randomized pricing is a

strategy in which a firm intentionally varies its price in an attempt to "hide" price information from consumers and rivals.

2. Grocery stores make most of their profits on soft drinks, beer, chips, and candy. A casual look at prices of these items reveals that these prices change extremely often and can vary as much as 50 percent. Is this because the wholesale price of these items fluctuates this dramatically, or is there some other possible explanation?

the firms may be charging randomized prices in order to keep the competition away from them. Grocery stores may use randomized pricing to keep competition away and to get most of the customers and generate more profits

HW Q: The more elastic the demand,

the lower the profit-maximizing markup

Commodity bundling is

the practice of bundling several different products together and selling them at a single "bundle price."