04. Price Discrimination Flashcards
The more inelastic a price is in a market, the….
…. higher should be price be set in this market
Arbitrage makes it difficult….
… to price discriminate
Theultimate objective of every pricing strategy is to…
… capture consumer surplus and convert it into additional profit for the firm
What are conditions for price discrimination?
1.
2.
3.
4.
- firms must have sufficient monopoly (market) power (makers vs takers)
- ability to seperae different groups into segments (requires information and sufficient market intelligence)
- ability to prevent re-sale (arbitrage) -> no secondary markets where arbitrage can take place at intermediate prices
- willingness to pay of consumers
A pricing strategy aims to….
… enlarge the customer base that the firm can sell to and capture as much consumer surplus as possible
What are the forms of price discrimination?
1.
2.
3.
4.
5.
6.
7.
- first degree price discrimination (chargina each customer reservation price (max willingness))
- second degree price discrimination (different prices per unit for different qtys of the same good, to idfferent consumers)
- third-degree price discrimination (dividing customers into groups with seperate demand curves)
- intertemporal price discrimination (Practice of dividing consumers with different demand curves
into two or more groups by charging different prices at different points in time) - peak-load pricing (Charging higher prices during peak periods when capacity constraints cause
marginal costs to be high) - two part tariff (Form of pricing in which consumers are charged both an entry and a usage fee.
) - bundling (Practice of selling two or more products as a package.)
First Degree Price Discrimination | Definition
Practice of charging each customer his/her reservation price
(maximum price that a customer is willing to pay for a good)
Second Degree Price Discrimination | Definition
Practice of charging different prices per unit for different
quantities of the same good or service
Third Degree Price Discrimination | Definition
Practice of dividing consumers into two or more groups with
separate demand curves and charging different prices to each group
Intertemporal Price Discrimination | Definition
+ whats a similar strategy?
Practice of dividing consumers with different demand curves
into two or more groups by charging different prices at different points in time ALTHOUGH the MC associated with selling output at various points in time is constant
Price skimming: Practice of dividing consumers with different demand functions into different groups
by charging different prices at different points in time
-> Consumers self-select the timing of their consumption
Peak-Load Pricing | Definition
Charging higher prices during peak periods when capacity constraints cause marginal costs to be high
Two-Part Tariff | Definition
Form of pricing in which consumers are charged both an entry and a usage fee
Bundling | Definition
Practice of selling two or more products as a package
A perfectly price discriminating
firm’s marginal revenue is…
…the same as its price. So, the firm’s
marginal revenue curve is the
same as its demand curve.
In perfect price discrimination….
the sum of consumer surplus and producer surplus is maximized
But, all the surplus goes to the firm,
consumer surplus is zero.
Third Degree Price Discrimination | What are the Effect of Group Price Discrimination on Total Surplus?
- group price discrimination results in inefficient production and consumption
What are reasons to Price skimming?
1.
2.
3.
4.
- production costs ends to decline over time
- competitive pressure is more significant in later stages of product life cycle
- demand curves differ at different times
- consumers differ as to their willingness to put up with some inconveniences or restrictions on product consumption
What is Price skimming and what does it imply?
1.
2.
What are reasons?
1.
2.
3.
4.
- practice of dividing customers with different demand functions into different groups by charging different prices at differnt points in time
-> C self select the timing of their consumption
-> similar to intertemporal price discrimination
——— - production costs tend to decline over time
- competitive pressure stronger in later stages of production cycle
- demand curves differ at different times
- c differ as to willingsness to put up with inconveniences or restrictions on production consumption
What are the different types of bundling?
1.
2.
3.
4.
- seperate (selling individually)
- pure bundling (selling products as a package)
- mix bundling (selling two or more goods both as package and individually)
- tying (practice of requiring a customer to purchase one good in order to purchase another)
Managers can increase profit by promoting…. which can be induced through….
Managers can increase profit by promoting consumer loyalty such loyalty can be induced through
warranty provisions
What is a critical thing that we use the pricing strategy for?
- realizing profits
A pricing strategy aims to…. and…
enlarge the customer base that the firm can sell to and capture as much
consumer surplus as possible.
More complicated pricing strategies requires….
1.
2.
…. a lot of information about demand.
Collecting information on buyer side are costly for the firms.
When doing imperfect price discrimination (beacuse perfect one is not really possible), firms must worry about…
… the characeristics of demand, abose all about the elasticity of demand.
What case of Price Discrimination are these:
- Multiday passes offered at lower prices per day than single day passes. Plus, tickets to large groups are offered at discount prices.
- Children and youths pay less han adults. Plus, discounts are offered for those willing to take the time to find tickets sold by certain vendors at a discount
- second degree
- third degree
The higher the transaction cost a consumer must incur to resell a good, the…
…. less likely resale becomes
Governments use tariffs to….
…limit resale by making it expensive to buy a branded good in a lower price counry and resell it in a high price country.
Perfect price discrimination is…
- efficient?
- not efficient?
1., because it maximized the sum of CS and PS
