ECON4350 FInal Study Guide

More examples for second degree

-Disney fast pass -Menu pricing -Delta Comfort+ vs Economy

Microsoft

-2nd degree PD: For Home, For Business, For Enterprise -3rd degree PD: Student discount (uga account for Office 365 on mac) -Bundling: Office 365 -Oligopoly -High barriers to entry

EVs/Tesla

-2nd degree PD: different prices for different models with different features -Low adoption rates by low income groups: not necessarily based on PD or local availability, but rather preferences among these groups -Electric vehicles rely on a network effect of chargers to be viable and increase their market: uptake relies on enough people owning EV's for there to be chargers in your area -Tesla basically has monopoly on chargers -Tesla -> vertical integration (controlling supply chain via in house production) -> economies of scope

Economies of scope vs economies of scale

-A company that benefits from economies of scope has lower average costs because costs are spread over a variety of products. -A company that benefits from economies of scale has a lower average cost because costs decrease as the amount produced increases. -In many cases, economy of scope is a generalization of economy of scale rather than an opposing concept.

The same hairdresser sometimes charges women higher prices for a haircut, in comparison to men. Give me one argument for why this may be because of price discrimination. Now give me one argument for why this may not be because of price discrimination.

-Argument for Price Discrimination: The hairdresser may argue that women often demand more complex hairstyles or additional services, justifying a higher price. This is a form of third-degree discrimination based on perceived differences in demand. -Argument Against Price Discrimination: It could be influenced by factors such as the time and effort required for different types of haircuts. If women's haircuts generally involve more intricate styling, longer time commitments, or the use of additional products, the higher prices may be justified based on the costs associated with providing the service. In this case, the pricing difference may be a reflection of the cost differences in delivering the haircut rather than an intentional strategy to discriminate based on gender.

Give me two examples of a firm that practices bundling of its products, and explain your reasoning

-microsoft office: cost savings for full package vs buying individually -spectrum: wifi and cable

Give me two examples of a firm that practices price discrimination of second degree, and explain your reasoning

-Health insurance: high deductible vs low -healthy people will buy high for lower monthly rate larger out of pocket initial -sick people will buy low for higher monthly rate and smaller out of pocket initial -no incentive to lie -consumers know what type they are and providers do not -Peach pass: certain people have higher WTP to get from point a to point b, no carding (provider doesn't know who is who)

Bundling example: Casablanca and Godzilla movies

-If you offer Casablanca at $7000, your PROFIT will be $14000 because both stations will buy it -If you offer Godzilla at $2500, your PROFIT will be $5000 -Total profit $19000, bundle to use monopoly power to maximize profit -Combined WTP is 10500 for A and 10000 for B, so you sell for 10000 and make 20000 profit

If there are two types of consumers (high demand and low demand) and you cannot do third degree price discrimination (student discounts, senior discounts, etc) then you have to offer different kinds of packages

-If you offer a product where you cannot card (tell who is high vs low), high demand consumers will lie, while low demand consumers will tell the truth -OR worsen low demand package, you'll lose money but high demand customers will hate low package and will no longer lie -ex: tall ppl will not want to fly economy, will choose 1st class

There are two firms competing via Bertrand (choice of prices) with an identical product. There are 1,000 consumers whose willingness to pay for the product is $100 (each consumer). Consumers choose to buy the product that maximizes their consumer surplus. Both firms' marginal cost is $80. You are the CEO of firm 1 and you are considering a potential investment: to spend $20,000 in research to make a differentiated product where the 1,000 consumers would now be willing to pay $150 for it (still under the same marginal cost of $80). a) Should you pursue this investment? b) You now see an alternative investment option: to spend the same $20,000 in research to reduce the marginal cost of the product from $80 to $c (still under the same willingness to pay for the product of $100). You can only do one of these two investments. What is the value of c for which you should be indifferent between the two investments?

-Initial profit: (p*q)-(mc*q): (100x1,000)-(80x1,000) =20,000 -New profit: (150x1,000)-(80x1,000) =70,000-20,000 =50,000 a) yes b) profit = 100-c per unit, revenue = 1,000x(100-c)-20,000, set equal to 50,000 profit from part a), c = 30 *double check this one So, when the reduced marginal cost (c) is $30, you should be indifferent between the two investments.

Give me two examples of a firm that practices price discrimination of third degree, and explain your reasoning

-Movie theaters: Student discounts bc students are price elastic -Pharmaceutical companies: sell drugs @ different prices across countries based on consumer's ability to pay, identifying lower income groups

Give me one example of a restaurant practicing price discrimination and one example of a restaurant practicing bundling. Explain why it might make sense for them to do so. Each example could be about a different restaurant or chain.

-PD: lower price menu during lunch hours than dinner hours, kids menu, denny's senior discount -Bundling: burger, fries, drink comb

Delta used to offer a discount for trips that include spending a Saturday night at the destination. After the Covid pandemic hit, Delta decided to increase the rate of this discount. To clarify, the prices of all tickets might have gone down after the pandemic, but the price of a ticket with a Saturday night destination has gone down faster. Give me an explanation for why this is the case.

-The increase in the rate of the Saturday night discount after the pandemic could be due to changes in demand patterns. With reduced overall travel, Delta might offer a larger discount for trips including a Saturday night to incentivize travelers to choose longer stays, helping the airline manage capacity and improve overall flight scheduling efficiency. -to get more leisure travelers who are more price elastic and have more flexible schedules

Give me two reasons why it makes sense to have a higher rate on sales taxes for luxury goods (e.g., fancy cars) versus basic goods (e.g., basic food and clothes). Specifically, I want one explanation for why it makes sense to do so to reduce inequality and another explanation for why it makes sense to do so to increase revenue from taxes, even if the government did not care about reducing inequality.

-To Reduce Inequality: Taxing luxury goods at a higher rate can help reduce income inequality by placing a greater burden on those with higher incomes, redistributing wealth. -To Increase Revenue: Luxury goods typically have inelastic demand, meaning consumers are less sensitive to price changes. Taxing these goods at a higher rate can generate more revenue for the government without significantly impacting consumption.

Cruise industry

-high barriers to entry -high overhead costs -shipbuilders -> high supplier power -fuel suppliers -> moderate/high power -food & bev suppliers -> moderate power -port authorities -> moderate/high supplier power PD: -1st degree: Royal Carribean dynamic pricing algorithms, ppl buy based on their WTP (kind of like auctioning) -2nd degree: Tiered pricing structures based on cabin types and amenities, with prices varying according to factors such as cabin size, location, and included perks. Additional amenities and services, such as onboard credit, dining packages, Wifi, or shore excursions, offered at an extra cost -3rd degree: targeted discounts, loyalty programs

McDonald's

-huge market share -4th largest employer worldwide -PD: -different prices in different countries -2nd degree: combo meals (vs individual entree and fries, etc) -> also bundling -3rd degree: Happy meals for kids -Domestic & overseas subsidiaries; overseas goals: 1. To achieve net-zero greenhouse emissions by 2050 2. By 2025, they plan to have 100% certified, recycled, or renewable packaging materials. ->Australia one focuses on sustainability with the start of opening franchises operating on 100% renewable energy, featuring carbon-neutral McDelivery

Consider a monopolist firm attempting to sell packages of park entrance plus a given number of rides in the park (e.g., Disney World) to two types of consumers, a high demand type and a low demand type. Originally, the firm sells to both types, since third (or first) degree discrimination is allowed. Now, suddenly, only second degree discrimination is allowed. Is it possible that the firm won't want to sell to both types now? Explain.

-initially charging people more who they knew had higher-demand -now, can only create high price and low price without knowing who will buy from which group -ex: entry + 2 rides, entry + 10 rides, etc -if cost structure for high and low demand groups is similar (and now unable to separate based on preferences) they may not want to sell to both types and may focus on those with higher demand

Give me two examples of an industry with economies of scope, and explain your reasoning.

Automobile Manufacturing: Automobile manufacturers often produce multiple models using shared components and assembly lines. Economies of scope are realized through the utilization of existing resources for producing diverse product lines, leading to cost savings and efficiency improvements. Media and Entertainment: Companies in the media and entertainment industry, such as Disney, benefit from economies of scope by leveraging intellectual property across various platforms like movies, merchandise, theme parks, and streaming services. By spreading fixed costs over a range of products and services, they achieve cost efficiencies.

Airlines were hit hard because of the pandemic, for obvious reasons. However, their profit did not go down as much as you might have expected if you were looking simply at the number of trips customers decided to take, which went down substantially more. Why?

Cost Reduction Measures: reducing flight frequencies, implementing layoffs or furloughs, renegotiating contracts with suppliers, and cutting discretionary spending. By lowering operating expenses, airlines were able to partially offset the decline in revenue caused by reduced passenger traffic. Government Support and Bailouts: Many governments around the world provided financial assistance to airlines to help them survive, including grants, loans, subsidies, and payroll assistance programs aimed at stabilizing the aviation industry and preventing widespread bankruptcies. Helped maintain liquidity, meet their financial obligations, and sustain their operations during a period of prolonged downturn in travel demand. Cargo Operations: While passenger travel declined significantly during the pandemic, demand for air cargo remained relatively resilient, driven by e-commerce growth, medical supply shipments, and other essential goods. Airlines were able to leverage their cargo operations to generate additional revenue streams and offset some of the losses incurred from reduced passenger traffic. Cargo services helped airlines utilize their aircraft fleet more efficiently and capitalize on opportunities in the freight market. Flexible Pricing and Revenue Management: Airlines implemented dynamic pricing and revenue management strategies to optimize their revenue streams amid fluctuating demand patterns during the pandemic. By adjusting ticket prices, offering promotions, and targeting specific customer segments, airlines were able to maximize their revenue per available seat mile (RASM) and yield, even in the face of reduced overall passenger volumes. Advanced revenue management systems and data analytics allowed airlines to adapt their pricing strategies in real-time to market conditions and competitor actions.

The market for regular sodas tends to be highly concentrated, with the vast majority of the sales going to Coke, Pepsi and Keurig Dr. Pepper. However, there are still several small soda companies that are able to be profitable and coexist with these giant companies. How can they still be profitable?

Differentiated Products: Smaller soda companies often differentiate their products from those of larger competitors by offering unique flavors, healthier ingredients, or niche market positioning. -> niche market segment, attract those willing to pay premium Regional Focus: Smaller soda companies may focus on serving specific geographic regions where they have a competitive advantage or strong brand recognition. -> relationships with retailers, distributors, and consumers Flexible Production and Distribution: Smaller soda companies often have more flexibility in their production and distribution processes compared to larger firms. They may operate smaller-scale production facilities that can quickly adapt to changing consumer preferences or market trends. Additionally, these companies may employ innovative distribution strategies, such as direct-to-consumer sales or partnerships with local businesses, to reach customers effectively and efficiently. Brand Loyalty and Authenticity: Some consumers value the authenticity and uniqueness associated with smaller soda brands, leading to strong brand loyalty and repeat purchases. Smaller soda companies may capitalize on this sentiment by emphasizing their heritage, craftsmanship, or commitment to quality ingredients, which can resonate with consumers seeking alternatives to mass-produced beverages. Cost Efficiency: Smaller soda companies may achieve cost efficiencies through leaner organizational structures, streamlined operations, and strategic sourcing of ingredients and materials. By focusing on efficiency and cost control, these companies can maintain competitive pricing and healthy profit margins despite operating on a smaller scale compared to their larger competitors.

AI industry

Fintech: -Banking and finance: algorithmic trading, loan underwriting, credit risk assessment -Insurance: claims processing/fraud detection -Payments: smart payment systems, transaction monitoring Healthcare: -patient portals -diagnosis and prevention -billing -drug development -mental health -public health tracking -decreased costs for healthcare service providers -more money directed toward patient care or further research Automotive Industry: -supply chain optimization -driver assistance -> -Increased unit output -Quality control and improvement -Job creation -Innovation drives business MAAMA Companies: -supply chain optimization -predictive modeling Agriculture: -Addresses key challenges such as increasing food demand, labor shortages, and climate change -Enhances productivity and sustainability by optimizing resource use and reducing waste -Increases crop yields and quality through precise and timely decision-making -Reduces environmental footprint by optimizing the use of water, fertilizers, and pesticides -Enhances ability to respond to real-time conditions and mitigate risks associated with weather and pests Film Industry: -Content and Script Creation -Pre-visualization -Storyboarding -Post-production -Filming Education: -personalized learning -predictive analytics -grading, scheduling, student inquiries -virtual TAs/tutoring Marketing: -Increased efficiencies like automating redundant tasks -Better predictability in marketing trends -Hyper-personalization of marketing messages and offers -Customer Engagement with things like chatbots and virtual assistants -Even the possibility of bringing up ethical concerns

Give me three examples of price discrimination in the airline industry. For each of them, explain whether it is first, second or third degree.

First: Online auctions for bidding on unsold seats Second: Different prices for basic, main, first class, seat selection Third: Military discounts, frequent flyer programs

Explain one reason why airbnb might be a more profitable business than regular hotels in a city (when we compare the profit per apartment, of course). Now explain one reason why the opposite (i.e. hotels more profitable than airbnb) might happen.

Reasons Airbnb Might Be More Profitable: Lower Operating Costs: Airbnb hosts typically have lower overhead costs compared to traditional hotel operators. They don't have to maintain a staffed front desk, provide daily housekeeping services, or invest in amenities like gyms and restaurants. As a result, Airbnb hosts can offer competitive prices while still achieving high profit margins per apartment. Reasons Hotels Might Be More Profitable: Economies of Scale: Large hotel chains often benefit from economies of scale, allowing them to negotiate better deals with suppliers, invest in more efficient operations, and spread fixed costs across a larger number of rooms. This enables them to achieve higher profit margins per room compared to individual Airbnb hosts, especially in popular tourist destinations where demand for accommodations is consistently high. Additionally, hotels can leverage their brand recognition and loyalty programs to attract customers and charge premium rates.

Nash equilibrium

a situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen in study guide example, dead middle and bottom right are nash equilibria

Two-part pricing

being charged by marginal cost. ex: -charging to enter bar, charging for beer -charging for entry to disney, not by ride. adults charged more than kids even though mc for both is 0. kids can't ride all rides or ride alone -costco: charged for membership, lower priced goods -college: mc for taking classes is 0 but you pay tuition

Most common type of PD

second-degree