Business Economics

Question 1

Types of price discrimination

Answer 1

Depending on the level of information the monopolist has about consumers’ willingness to pay:

1. personalized pricing
2. menu pricing
3. group pricing

Question 2

Why a price discrimination strategy could not exhibit quantity discounting?

Question 3

What is the difference between applying uniform pricing and price discrimination

Answer 3

In uniform pricing: the monopolist needs only to know how the willingness to pay for the product in the overall market varies with the
quantity demanded.

In price discrimination, the monopolist must know how different kinds of consumers differ in their demands for its good.

Question 4

What is price discrimination?

Answer 4

A monopolist sells the same product to different buyers at different prices

Question 5

Explain a two sided market.

Answer 5

Is when 2 sets of agents interact through an intermediary or platform. And the decisions of each set of agents affect the outcomes of the other set through externalities = Network effects.

Question 6

Describe the direct and indirect network effects.

Answer 6

The network effects are the externalities that affect a market.

Direct network effects (or within-group) occure in the same side of the market. Is when the “users” have a utility not only from the service but also from the interaction with other users (the service has more value when there are more users) “social media”.

Indirect network effects or (cross-group) different agents play different roles (belonging to different groups) and they benefit differently from a transaction. Like UBER or the PS5.

Question 7

Explain the differences between a transaction and a non-transaction market.

Answer 7

Transaction markets observe the transaction and can set a price per transaction. Like UBER.

In non-transaction markets the platform which connects the 2 agents does not observe the transactions, so it can’t set a price per transaction, maybe a fee. Like advertisers on sites.

Question 8

What is surge pricing?

Answer 8

Also called dynamic pricing or demand pricing, or time-based pricing, is a revenue management pricing strategy in which businesses set flexible prices for products or services based on current market demands. (uber price being higher at traffic hours for ex.)

Question 9

Is surge pricing a way of price discrimination?

Answer 9

This price strategy is also called dynamic pricing, and yes it could be considered a form of price discrimination, among the ones we have studied it would be Group Pricing.

Question 10

What are the two main determinants of your maximum willingness to pay for a specific
product?

Answer 10

Income and personal preferences

Question 11

What is the Freemium pricing strategy?

Answer 11

When a product or service is offered in two options; basic features for free and a premium version of the product with more features, resources, services and advantages for a positive price.

It could be considered a way of price discrimination. (menu pricing)

Question 12

Give example of a freemium pricing strategy

Answer 12

Spotify, adobe, LinkedIn many different softwares and apps.

Question 13

Under which conditions does a freemium pricing strategy increase profits compared to uniform pricing?

Answer 13

A Freemium strategy could attract additional potential customers and maybe increases their WTP over time after they get used to the product or service.

Having a diverse and large data base, low marginal costs, high potential rate of conversion, significant network effects, effective engagement and retention strategies.

Question 14

what is vertical differentiation? ||h

Answer 14

Changes in quality, higher quality products than competitors.

Question 15

what is horizontal differentiation? ____
____

Answer 15

Changes in variety, larger range of different products.

Question 16

Under which condition price discrimination can increase total welfare vs a situation in which the monopolist charges a uniform price.

Answer 16

When price discrimination leads to an increased consumption and demand that otherwise wouldn’t occur under uniform pricing. Like in group pricing where we can group the consumers by their WTP.

Question 17

Give real-world examples of goods and/or services that are differentiated both horizontally and vertically.

Answer 17

Wine, music, hotels.

Question 18

what is price skimming?

Answer 18

is a strategy, where the products are priced very high so that fewer sales are needed to break even. high price at the beginning and lowering with time.

Question 19

Which factor make price skimming a successful strategy for profit maximization.

Answer 19

quality, horizontal differentiation, marketing, factors that decrease the elasticity of a product or service.

Question 20

For an innovative product or service that is protected by a patent. Would price skimming be a successful pricing strategy for profit maximization?

Answer 20

no because people may not know yet the product and may not be willing to pay a high price.

Question 21

Which pricing strategies could maximize profits for an innovative product or service that is protected by a patent?

Answer 21

• Freemium
• Penetration pricing (the opposite to skimming)
• Bundling
• Other types of price discrimination

Question 22

what is industrial organization?

Answer 22

branch of economics that studies the imperfect market competition

Question 23

What is shrink-flation?

Answer 23

is when the price is kept but products are made smaller. (like Mcdonald’s burgers)

Question 24

How we choose the optimal pricing strategy?

Answer 24

we need to be aware of :
1. the features of our product
2. habits of customers
3. competitors

Question 25

what is a cost-plus pricing strategy?

Answer 25

when we add a fixed mark-up to the cost unit. based on costs. (ex: cost x 2.35)

Question 26

What’s the break-even method for pricing?

Answer 26

We consider all type of costs to to find the brake-even point of the firm.

Question 27

What’s the correlation index?

Answer 27

The correlation between prices and demand. -1 negative correlation; 1 positive correlation.

Question 28

What’s the Lerner Index?

Answer 28

Measure of the degree of market power by the difference between the price and the marginal cost of production.

L=0 no market power; perfect competition
L=1 large market power; monopoly

if the elasticity is high the lerner index is low.

Question 29

What’s the Lerner Index formula

Answer 29

L= ( price - marginal cost) / price

Question 30

What is group pricing?

Answer 30

is a price discrimination strategy where the monopolist offers different prices to different groups, but all consumer of the same group are charged the same price. (we can group the consumers by their WTP)

is consider linear pricing

Question 31

What is the consumer surplus?

Answer 31

when the price the consumer pays is less than what they are willing to pay. (esta barato jaja)

Question 32

example of group pricing.

Answer 32

• kids no paying
• student prices
• tourist price
• Hard or soft cover books
• 1st & 2nd class tickets

Question 33

2 similar pricing schemes to personalized pricing.

Answer 33

1. Two part pricing:
   Fee + per unit price
   Memberships + unit price (specially if they charge different fees and same unit price). men or women entrance and drinks at a bar.
2. Block pricing:
   Bundle of price & quantity
   ( $45 for the entrance and 3 drinks)

all this obviously matching their WTP.

3. personalized discounts because these are considered less unfair.

Question 34

What’s menu pricing?

Answer 34

The more you buy the less you pay per unit. Different from block pricing because with this one we offer various options with different sizes at different prices. (like things at the supermarket)

Considered non linear pricing.

Question 35

What are the concentration indexes?

Answer 35

They aim to capture the number of active firms and the relative size of each one to measure the concentration in an industrial sector. (To compute them we need the market share)

The higher the index the higher the concentration. = Less competition.
from 0 to 10.

Question 36

C2 Index

Answer 36

Sums the market share of the 2 biggest firms on the sector.

Question 37

C4 Index

Answer 37

Sums the market share of the 4 biggest firms on the sector.

Question 38

H.H.I index

Answer 38

Sums the squares of the market shares of all firms in the sector.

H.H.I. reflects not only the size of firms but also size inequality across firms in a market.

Question 39

an example of non digital two sided market?

Answer 39

a mall

Question 40

Examples of two sided markets.

Answer 40

Uber, whatsapp, Tinder, ebay, amazon, airbnb, booking, instagram…

Question 41

What is strategic interaction?

Answer 41

When firms need to consider the rivals’ actions, strategies, prices, advertising, sales..
Common in oligopolistic traditional one sided markets.

Question 42

What is game theory?

Answer 42

The study of multiperson decision problems. this theory assumes that each player want´s to maximize payoffs

Question 43

Type of games in game theory.

Answer 43

1. cooperative: collusion
2. non cooperative: competition
3. simultaneous
4. sequential

Question 44

An example of olipolistic market with no cooperation

Answer 44

smartphones
airlines
cars

Question 45

The 3 basic oligopoly markets

Answer 45

Cournot= static competing over quantity (Nash E.)

Bertrand= static competing over price (Nash E.)

Stackelberg sequential competing over quantity. (backwards induction)

Question 46

why h.h.i is better at measuring the competitiveness among industries?

Answer 46

because it provides a more detailed picture of the overall market concentration