[2] Price Strategies Flashcards
Price discrimination occurs when _________
consumers pay a different____ ____ without
this being justified by ______ _______
• Firms sometimes use nonuniform pricing, where
prices vary across customers, to earn a higher profit.
• Examples x5
average price, different utility Firms sometimes use nonuniform pricing, where prices vary across customers, to earn a higher profit. • Examples – domestic /international tuitions at universities in, – passenger airline tickets – senior citizen, student discounts – Pharmaceutical products - Train [peak/off-peak, 16-25 railcard] - student discounts eg: spotify - Uber surge charges
Conditions for Price Discrimination x3
1.A firm must have market power (otherwise it
cannot charge a price above the competitive price).
• Examples: monopolist, oligopolist, monopolistically
competitive, cartel
2.A firm must be able to identify which consumers are
willing to pay relatively more and there must be
variation in consumers’ reservation price, the
maximum amount someone is willing to pay.
3.A firm must be able to prevent ARBITRAGE or limit resale from customers who are charged a relatively low price to those who are charged a relatively high price.
Two reasons why a firm earns a higher profit from price
discrimination than uniform pricing:
1.Price-discriminating firms charge higher prices to
customers who are willing to pay more than the
uniform price.
2.Price-discriminating firms sell to some people who are not willing to pay as much as the uniform price.
What is the biggest obstacle to successful price discrimination?
When is resale impossible? x2
Egs x3
A firm’s inability to prevent resale (arbitrage) is often
the biggest obstacle to successful price discrimination.
For a service and when transaction costs are high
Haircuts, plumbing services, admin requiring ID
When is differential pricing not price discrimination?
x2 egs
It is not price discrimination if the different prices
simply reflect differences in costs.
Examples:
• selling magazines at a newsstand for a higher price than via direct mailing
• consumers at different distances from a plant pay different prices, but the price difference just equals the difference in cost
What is First Degree PD?
AKA?
• Each unit is sold for customer’s ___ ____
Personalised Pricing: Individualized price for each unit purchased by each buyer → full surplus extraction
Also known as perfect price discrimination
• Each unit is sold for customer’s reservation price (their maximum willingness to pay)
3rd Degree PD?
Group Pricing: Segmentation based on indicators related to consumers’ preferences → different prices per group
2nd Degree PD?
Menu Pricing: No observable indicators → use of self-selecting devices (target a specific package for each class of buyers)
1st degree: the discriminating monopoly’s revenue is what area? Where will the firm produce? This yields that all \_\_\_ \_\_\_\_ is transformed into \_\_\_. Why is outcome efficient?
equal to the area under the demand curve up to Q
produce where D(Q) equals MC
consumer surplus, profit
- it maximizes total welfare
- no deadweight loss is generated
• Firms divide potential customers into two or more
groups (based on differences in ___ ___ ___) and set a different ___ for each group.
The firm chooses ____ sold to each group
FOCs imply that ___ ____ from each group should be the same and equal to ____ ____
A ____ price will be charged in the market
with the more price-_____demand
PED, price
quantities
Marginal revenue, marginal cost
Higher, inelastic
Welfare under multimarket price discrimination is ____
than it is under either competition or ___ ____ ____.
• Under competition, more ____ is produced and __ ___ is greater
• The welfare effects relative to uniform price monopoly are indeterminate.
• Both types of monopolies set price above ___ ____, so _____ is lower than in competition.
• However, under price discrimination welfare could be
improving, giving access to the good to consumers who otherwise would not.
lower, perfect price deiscrimination
output, consumer surplus
marginal cost, output
2nd Degree Price Discrimination:
Price varies only with the _____, but each
customer faces the ____, _____pricing schedule.
quantity, same nonlinear
Three types of 2nd Degree PD?
Block-pricing schedule
Two-parting pricing
Tie-In Sales
What is Block-pricing schedule?
Example?
Many utilities use block-pricing schedules, by which
they charge one price for the first few units of usage
(block) and then a different price for subsequent blocks. It is a type of 2nd degree PD.
• Example: increasing-block pricing associated with
electricity; per KWH charge increases the more you use
What is Two-part pricing?
Examples x3?
is when the firm charges a consumer a fixed fee for the right to purchase (first tariff) and a per transaction fee for each unit actually purchased (second tariff).
[Think of the first tariff as an “access fee” and the
second as a “usage fee”]
Golf Club: membership fee and fee to play a round
FairGround: charges entry and you pay for each ride
Mobile Providers: monthly fee and fee per text (prev)
