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Ch 11 Pricing with Market Power

by: Natalie Strawn

Ch 11 Pricing with Market Power ECO 420K

Natalie Strawn
GPA 3.66

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About this Document

These notes cover market power, prices, and various levels of price discrimination.
John Thompson
Class Notes
Economics, Microeconomics, prices, markets, discrimination
25 ?





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This 4 page Class Notes was uploaded by Natalie Strawn on Monday July 4, 2016. The Class Notes belongs to ECO 420K at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months taught by John Thompson in Summer 2016. Since its upload, it has received 13 views. For similar materials see MICROECONOMIC THEORY in Economcs at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months.


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Date Created: 07/04/16
June 27, 2016 Ch 11 – Pricing with Market Power Museum has daily demand of P = 40 - 0.1Q and MC = 0 -Solve for Q*m and P*m Why not raise or lower price? -A single price monopoly leaves some consumer surplus and some deadweight loss. (Figure 11.1) Price Discrimination -Price discrimination is the practice of charging different prices based on elasticity to different consumers for similar or identical goods. -It allows a firm with pricing power to capture more “willingness to pay” and enhance profits. Common examples: -Museums – locals/tourists; “pay what you can” -Movies – matinee/evening -Restaurants – early bird specials -Bars – happy hour; ladies’ night -Child, student, senior discounts -Car dealers -Grocery stores – bulk discounts; coupons; loyalty cards -Colleges – financial aid; in-state, out-of-state, foreign -Airlines – business/pleasure; frequent fliers Other examples: -Restaurants – lunch v. dinner portions (and prices) -Airlines – coach, business, first class - “VIP” access -Beauty products (male v. female) – the “pink tax” Note that these may be different goods with different costs. Is it price discrimination? -If the change in price is more than proportional to the change in marginal cost, it must be based on change in elasticity of price and thus is it price discrimination. -A buyer’s “reservation price” is the maximum they are willing to pay. First degree price discrimination – charging each customer their reservation price. (AKA “perfect price discrimination”) …allows the firm to capture all CS and DWL. Q and TS same as competition. (Figure 11.2) Examples: -Auctions -Car sales -Haggling Second degree price discrimination – charging different prices for different quantities. Examples: -Quantity discounts -Declining block rate pricing for utilities (Figure 11.4) Third degree price discrimination – charging different groups (with different price elasticities) different prices. (Figure 11.5) Seller must be able to: 1) Easily distinguish different groups 2) Prevent ‘arbitrage’ (purchasing the same thing in cheap market and selling it for more in the expensive market) 3) Prevent resentment Examples: -colleges (financial aid, in-state, out of state, foreign) -airlines (business/pleasure, frequent fliers) Intertemporal price discrimination – charging different prices at different points in time. (A type of third degree price discrimination) Examples: -lunch vs dinner prices -books sales -clothing -happy hour A two-part tarif is a price discrimination technique in which price is composed of two parts: a lump-sum fee as well as a per-unit charge. The strategy: -set P = MC to maximize usage -this maximizes value to consumers -extract as much value as possible through a membership fee Examples: -country clubs -health clubs -Costco Ex. country club pricing The annual demand for a golf at a country club is P = 300 -2Q and marginal cost is $50. 1) What is the optimal uniform price? Profits? $175, $7,812.50 2) What are the optimal variable (usage) and fixed (membership) fees? Profits? $50, $15,625, double profits Product bundling is offering several products for sale as one combined product. Pure bundling: -only offer a bundled product instead of separate products -allows you to aggregate value and extract it with one price Mixed bundling: -offer separate products and a bundled product -allows you to offer discounts to consumers who buy more Bundling examples: -phone/cable/internet -software bundles -cable TV tiers -fast food meals -box sets and anthologies Example -software bundling Three customer types with different values for software: Customer Word Spreadsheet Presentation Combined type processor software software value Type a $45 $20 $10 $75 Type b $20 $45 $10 $75 Type c $10 $20 $50 $80 1) Unbundled prices and profits… Profits = 75 X 3 = $225 2) Bundled prices and profits…


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