04. Price Discrimination

Question 1

The more inelastic a price is in a market, the….

Answer 1

…. higher should be price be set in this market

Question 2

Arbitrage makes it difficult….

Answer 2

… to price discriminate

Question 3

Theultimate objective of every pricing strategy is to…

Answer 3

… capture consumer surplus and convert it into additional profit for the firm

Question 4

What are conditions for price discrimination?

1.
2.
3.
4.

Answer 4

1. firms must have sufficient monopoly (market) power (makers vs takers)
2. ability to seperae different groups into segments (requires information and sufficient market intelligence)
3. ability to prevent re-sale (arbitrage) -> no secondary markets where arbitrage can take place at intermediate prices
4. willingness to pay of consumers

Question 5

A pricing strategy aims to….

Answer 5

… enlarge the customer base that the firm can sell to and capture as much consumer surplus as possible

Question 6

What are the forms of price discrimination?

1.
2.
3.
4.
5.
6.
7.

Answer 6

1. first degree price discrimination (chargina each customer reservation price (max willingness))
2. second degree price discrimination (different prices per unit for different qtys of the same good, to idfferent consumers)
3. third-degree price discrimination (dividing customers into groups with seperate demand curves)
4. 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)
5. peak-load pricing (Charging higher prices during peak periods when capacity constraints cause
   marginal costs to be high)
6. two part tariff (Form of pricing in which consumers are charged both an entry and a usage fee.
   )
7. bundling (Practice of selling two or more products as a package.)

Question 7

First Degree Price Discrimination | Definition

Answer 7

Practice of charging each customer his/her reservation price
(maximum price that a customer is willing to pay for a good)

Question 8

Second Degree Price Discrimination | Definition

Answer 8

Practice of charging different prices per unit for different
quantities of the same good or service

Question 9

Third Degree Price Discrimination | Definition

Answer 9

Practice of dividing consumers into two or more groups with
separate demand curves and charging different prices to each group

Question 10

Intertemporal Price Discrimination | Definition

+ whats a similar strategy?

Answer 10

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

Question 11

Peak-Load Pricing | Definition

Answer 11

Charging higher prices during peak periods when capacity constraints cause marginal costs to be high

Question 12

Two-Part Tariff | Definition

Answer 12

Form of pricing in which consumers are charged both an entry and a usage fee

Question 13

Bundling | Definition

Answer 13

Practice of selling two or more products as a package

Question 14

A perfectly price discriminating
firm’s marginal revenue is…

Answer 14

…the same as its price. So, the firm’s
marginal revenue curve is the
same as its demand curve.

Question 15

In perfect price discrimination….

Answer 15

the sum of consumer surplus and producer surplus is maximized
But, all the surplus goes to the firm,
consumer surplus is zero.

Question 16

Third Degree Price Discrimination | What are the Effect of Group Price Discrimination on Total Surplus?

Answer 16

• group price discrimination results in inefficient production and consumption

Question 17

What are reasons to Price skimming?

1.
2.
3.
4.

Answer 17

• 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

Question 18

What is Price skimming and what does it imply?

1.
2.

What are reasons?

1.
2.
3.
4.

Answer 18

• 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

Question 19

What are the different types of bundling?

1.
2.
3.
4.

Answer 19

• 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)

Question 20

Managers can increase profit by promoting…. which can be induced through….

Answer 20

Managers can increase profit by promoting consumer loyalty such loyalty can be induced through
warranty provisions

Question 21

What is a critical thing that we use the pricing strategy for?

Answer 21

• realizing profits

Question 22

A pricing strategy aims to…. and…

Answer 22

enlarge the customer base that the firm can sell to and capture as much
consumer surplus as possible.

Question 23

More complicated pricing strategies requires….

1.
2.

Answer 23

…. a lot of information about demand.
Collecting information on buyer side are costly for the firms.

Question 24

When doing imperfect price discrimination (beacuse perfect one is not really possible), firms must worry about…

Answer 24

… the characeristics of demand, abose all about the elasticity of demand.

Question 25

What case of Price Discrimination are these:

1. Multiday passes offered at lower prices per day than single day passes. Plus, tickets to large groups are offered at discount prices.
2. 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

Answer 25

1. second degree
2. third degree

Question 26

The higher the transaction cost a consumer must incur to resell a good, the…

Answer 26

…. less likely resale becomes

Question 27

Governments use tariffs to….

Answer 27

…limit resale by making it expensive to buy a branded good in a lower price counry and resell it in a high price country.

Question 28

Perfect price discrimination is…

1. efficient?
2. not efficient?

Answer 28

1., because it maximized the sum of CS and PS