Pricing Strategies for Firms with Market Power

suppose a downstream division pays a price for inputs from an upstream division that exceeds marginal cost. what is the result?

- less-than-optimal overall profits for the firm - a final price that exceeds the profit-maximizing price

which of the following can yield profits higher than those achieved by a single price to all buyers such that MC = MR?

- price discrimination - block pricing - commodity bundling

in order for third-degree price discrimination to enhance profits

- the elasticity of demand for various consumers must be different - sellers must be able to prevent resale - firms must be able to determine the elasticity of demand of different consumers

commodity bundling can enhance profits when

- the firm does not know consumers' willingness to pay - consumers differ in their willingness to pay

suppose that "roper's rice" faces a price elasticity of demand estimated to be -2.7. In this case, the profit-maximizing price will be _____ times the marginal cost

1.6

identify the term that refers to the practice of combining several products together and selling them together at one price

commodity bundling

in two-part pricing, the optimal fixed fee is the amount of _____ surplus

consumer

if the demands for two products produced by a firm are interrelated through costs or demand, selling one product at or below cost and the other product above cost can enhance profits. What is this strategy called?

cross subsidization

optimal pricing strategies in various market structures tend to be

different depending on the structure and the instruments

one of the most basic pricing strategies for firms with market power is to set price such that marginal revenue equals _____ _____

marginal cost

when a firm advertises that it "will not be undersold" it is likely pursuing a _____-_____ strategy

price-matching

when price elasticity of demand is infinite,

profit-maximizing price equals marginal cost

two-part pricing produces which of the following outcomes?

profits greater than those made by charging a single price, where MR = MC

changing prices from hour to hour or day to day in an attempt to "hide" pricing information from consumers is called _____ _____

randomized pricing

a common practice in the electric utility industry is to charge a higher rate on the first 150 kilowatt hours than on subsequent hours. This method of extracting some consumer surplus is called

second-degree price discrimination

which pricing strategy is easily employed by monopolists, cournot oligopolists, and monopolistic competitiors?

set price such that MR = MC

how can a firm overcome the problem of double marginalization?

set transfer prices that maximize the overall value of the firm

if all firms adopt price-matching strategies, then each firm charges

the monopoly price

student discounts and senior citizen discounts are examples of _____-_____ price discrimination

third-degree

the internal price at which an upstream division should sell inputs to a downstream division in order to maximize overall profits is called _____ pricing

transfer

a health club charges consumers an enrollment fee and also a monthly fee. This is an example of _____-_____ pricing.

two-part

when a firm charges a fee for the right to purchase a product, what type of pricing strategy is the firm employing?

two-part pricing

how does two-part pricing differ from price discrimination?

two-part pricing doesn't require different elasticities among consumers

the higher the marginal cost, the higher the profit-maximizing _____

price

which of the following is a reason to avoid a price matching strategy?

- a firm cannot prevent a consumer from lying about lower prices elsewhere - a competitior has lower costs

how do firms benefit from inducing brand loyalty?

- a firm reduces the number of customers who will switch to another firm if it undercuts its price - customers will continue to buy a firm's product even if another firm offers it at a better price

HOW DO MANY FIRMS INDUCE BRAND LOYALTY?

- advertising that promotes a product as "better" than a competitor's product - frequent-visit cards and preferred customer cards

cross subsidization is an appropriate pricing strategy when which of the following are present?

- cost complementarities - interrelated demand - interrelated costs

what occurs if both an upstream and a downstream division of a firm both charge a price that exceeds marginal cost?

- double marginalization - less-than-optimal overall profits

which of the following are criticisms of the markup formulas?

- elasticity of demand changes as the price changes - elasticity of demand increases as price increases

firms can reduce the incentive to shop for low-price information by

- increasing uncertainty about the best deals - changing prices with unpredictable regularity

WHICH OF THE FOLLOWING METHODS CAN FIRMS USE TO INDUCE BRAND LOYALTY?

- rebates after multiple purchases - advertising campaign

randomized pricing strategies tend to

reduce competitors' incentive to engage in price wars

how does block pricing enhance a firm's profits?

it forces consumers to make an all-or-nothing purchase

firms use _____ pricing when they package products together in order to enhance profits by forcing consumers to make an all-or-nothing decision

block

six-packs of soda, cartons of eggs, and three-packs of paper towels are all examples of

block pricing

charging higher prices when demand is higher (peak times) than when demand is lower (off-peak times) tends to do which of the following?

enhance profits

in order to maximize profits under a third-degree price discrimination scheme, a firm with market power produces the output where marginal revenue

equals marginal cost to each group

the overall profits of a firm are maximized when the upstream division produces the inputs such that its marginal cost

equals the net marginal revenue of the downstream division

managers can more accurately estimate the profit-maximizing price using a(n)

estimated demand function and marginal cost

if a firm manager is able to determine and charge the maximum amount that each consumer would be willing to pay for a good or service, it is called _____-degree price discrimination

first

profits earned by a firm that can perfectly price discriminate tend to be _____ than those earned by a firm that practices second-degree price discrimination

greater than

if an upstream manager has market power and produces inputs for a downstream firm where MR = MC, then the price that the downstream division pays for the input is

greater than marginal cost