Econ Modules 10.3, 10.4, & 10.5

How can companies segment a market so they can do price discrimination to earn profit?

1) Group pricing 2) Hurdle method 3) Tying 4) Bundling

Under the Five Forces framework, how can the market power of customers impact a seller's profitability?

Customers with market power can use their leverage to lower the selling price that sellers charge.

In which of the following cases would a company's profits be threatened?

One of its key input providers gains market power in the input market.

non price competition

businesses compete by differentiating products

hurdle method: quantity

buying more means a lower per unit price to entice people to buy a large amount

Perfect price discrimination is characterized by charging

each customer a price equal to his or her maximum willingness to pay.

competitors in other markets: threat of substitutes

not just about whether it is cheaper but whether you get a better bang for your buck/ bigger threat when switching costs are low

a firm with market power can charge a higher price than the one under

perfect competition

potential competitors: threat of entry from

potential new businesses and existing businesses that could expand to your market

bargaining power of buyers

powerful buyers can force you to offer lower prices

Mario's Bed & Breakfast is willing to offer discounts to customers, but it does not advertise discounts. Discounts are given only to customers who ask if any discounts are available or who seem very indecisive when inquiring rates. As a result of this practice, some customers pay full price, and others pay lower prices. Mario is practicing _____ through _____.

price discrimination; the hurdle method

price discrimination

selling the same good at different prices

price discrimination leads to higher prices for

some and lower prices for others

Which of the following is NOT one of the five forces that determine the structure of competition in a market?

the existing market price

When setting prices for different groups of customers, a manager should charge higher prices for groups that

value the product more.

to be successful with price discrimination you must sort out

which customers need a low price to be enticed to buy and who will pay a high price by charging just below the demand curve

perfect price discrimination

charge each customer their reservation price

goal of price discrimination strategy is to

charge each individual customer the highest price you can get away with

When looking at a firm's behavior, you know it is engaging in price discrimination when it

charges a different price to different customers that is not reflective of the firm's costs.

group pricing

charging different groups of people different prices

tying

company sells you a product that can only be used with another product from that company ex: printer and their refillable ink/ companies will lower the price of the printer and increase price of ink refills since you already bought the computer and now have to buy expense ink refill for the printer to work

Which of the scenarios does NOT fit into the model of the five competitive forces?

competition from complement goods and services

how to decide what price to charge each segment in group pricing?

follow rational rule for sellers and charge each different group the price where MC = MR on each firm demand curve for each group

bargaining power of suppliers

if you are very dependent on your suppliers they can charge higher prices

market structure determines

long term profitability

The competitive forces in a market largely determine the _____ of the companies in the market.

long-term profitability

reservation price

maximum price a customer is willing to pay/ their willingness to pay or marginal benefit t

students demand for movie tickets is lower and flatter since it is

more elastic as students are more responsive to changes in prices

The threat of potential substitutes is high when the substitutes:

offer greater value for their price than the original product.

hurdle method

offer lower prices only to those buyers who are willing to overcome some hurdle, or obstacle/ making it difficult to buy a certain type of production by selling alternate versions of that same product ex: VIP section at concert

hurdle method: time and hassle

people with high opportunity cost of time are less likely to go through hassle of getting a discount

You've been browsing some new styles on Old Navy's website, where you often shop, and have filled your virtual cart with a few nice items. But you leave the site without completing your purchase. A few days later, Old Navy sends you an e-mail with a 10%10% discount code to apply to your cart, within a limited time frame. Why do companies like Old Navy send specialized offers like this one?

price discrimination.

pro-business

protecting businesses from competition ex: monopoly charging more and producing less to gain more producer surplus

existing competitors: determine type and intensity of existing competition

the greater degree of rivalry the lower your profits/ rivalry is more intense when you face competitors producing similar goods/ competition can either be price or non price

price discrimination can help solve inefficiency since it increases

the quantity sold due to discounts more is sold solving the issue where businesses with market power under produce

To prevent people from pretending to qualify for the market segment with the lowest price, a company manager that engages in group pricing needs to make sure that

there is a simple way to verify the segment in which a consumer qualifies.

Heri owns one of three shoe repair shops in his city. Then he loses some of his customers when a luggage repair shop expands its services to include shoe repair as well as luggage repair. Which of the five forces in the Five Force framework is Heri facing when the luggage shop expands its services?

threat of entry

pro-market

trying to get a more competitive environment to increase economic efficiency

Sergio sells identical shirts under two brand names — Rags and Bees. The shirts with the Rags label sell for $70, and the shirts with the Bees label sell for $40. The Rags shirts hang wrinkle-free on a hanger, and the Bees shirts are folded and have some wrinkles. This is an example of price discrimination through

using an imperfect product to create a hurdle.

When segmenting your market demand into groups, base them on _____ and _____ characteristics.

verifiable; difficult-to-change

price competition

when a business competes by lowering prices/ works with similar products and low switching costs

bundling

when goods are bought together in a package ex: values meals at a fast food restaurant entice you to buy more than you wanted

analyze each group separately since each group is a separate market

1) charge higher prices to groups who value the product more 2) charge lower prices to groups especially price sensitive

successful price discrimination has two parts

1) charge higher prices to those who will pay: redistributes economic surplus from buyers to sellers 2) offer selective discounts to induce new customers: do not reduce price below your marginal costs/ ultimately you will face additional sales which will increase producer surplus and consumer surplus

how to segments your market into groups

1) segment into groups whose demand differs by using observable proxies 2) link group discounts to verifiable and difficult to change characteristics so customers cannot lie or switch groups to get a discount ex: child discount or asking for student ID for student discount

conditions for price discrimination

1) you business has market power 2) you can prevent resale (otherwise people who qualify for low prices will buy your product and resell to folks you where hopping to charge higher prices) 3) you can target the right prices to the right customers (you need to be able to figure out which customers can withstand a higher price and which need a lower)

Which of the scenarios is the best example of a firm practicing perfect price discrimination?

A psychic who is able to divine exactly what her information is worth to each customer.

Which of the following sellers faces the least competitive pressure?

a monopolist with no direct rivals

Customers would be less loyal and more price sensitive in which of the following situations?

The switching costs are low.

profit of firm =

area of triangle above MC and below demand curve

succeeding at perfect price discrimination will allow

you to charge the highest price possible on each sale and make all possible sales where a customers marginal benefit exceeds your marginal costs