Final Sophisticated Pricing strategies

(Figure: Pay Per View Movies on Xfinity Cable) Use Figure: Pay Per View Movies on Xfinity Cable. The figure shows the demand and marginal revenue curves for on-demand movie rentals on Xfinity Cable. Assume that marginal cost and average cost are constant at $30. If the cable company practices perfect price discrimination, then it will sell _____ movie rentals.

8

Why is market power necessary for price discrimination?

Without market power, a seller would lose customers if he tried to charge a higher price.

When the hurdle method is used to price discriminate, buyers

sort themselves into reservation price groups based on their willingness to overcome the hurdle.

When setting prices for different groups of customers, a manager should charge higher prices to groups that have _____ and lower prices to groups that have _____.

higher marginal benefit; lower reservation prices

Why would it be a bad idea for a retailer to use "wearing nail polish" as the basis for segmenting customers into groups for price discrimination?

People can easily switch from wearing nail polish to not wearing it.

When a company practices price discrimination, it will keep adding customers until the point where the

company's marginal cost equals the last customer's marginal benefit.

(Figure: Price Discrimination) A business that price discriminates will produce at what output level?

Quantity 3

What three conditions must be present before a company can price discriminate?

The company can identify how much each customer is willing to pay; the product cannot be resold; the company has market power.