Business Economics Flashcards
Types of price discrimination
Depending on the level of information the monopolist has about consumers’ willingness to pay:
- personalized pricing
- menu pricing
- group pricing
Why a price discrimination strategy could not exhibit quantity discounting?
What is the difference between applying uniform pricing and price discrimination
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.
What is price discrimination?
A monopolist sells the same product to different buyers at different prices
Explain a two sided market.
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.
Describe the direct and indirect network effects.
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.
Explain the differences between a transaction and a non-transaction market.
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.
What is surge pricing?
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.)
Is surge pricing a way of price discrimination?
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.
What are the two main determinants of your maximum willingness to pay for a specific
product?
Income and personal preferences
What is the Freemium pricing strategy?
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)
Give example of a freemium pricing strategy
Spotify, adobe, LinkedIn many different softwares and apps.
Under which conditions does a freemium pricing strategy increase profits compared to uniform pricing?
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.
what is vertical differentiation? ||h
Changes in quality, higher quality products than competitors.
what is horizontal differentiation? ____
____
Changes in variety, larger range of different products.
Under which condition price discrimination can increase total welfare vs a situation in which the monopolist charges a uniform price.
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.
Give real-world examples of goods and/or services that are differentiated both horizontally and vertically.
Wine, music, hotels.
what is price skimming?
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.
Which factor make price skimming a successful strategy for profit maximization.
quality, horizontal differentiation, marketing, factors that decrease the elasticity of a product or service.
For an innovative product or service that is protected by a patent. Would price skimming be a successful pricing strategy for profit maximization?
no because people may not know yet the product and may not be willing to pay a high price.
Which pricing strategies could maximize profits for an innovative product or service that is protected by a patent?
- Freemium
- Penetration pricing (the opposite to skimming)
- Bundling
- Other types of price discrimination
what is industrial organization?
branch of economics that studies the imperfect market competition
What is shrink-flation?
is when the price is kept but products are made smaller. (like Mcdonald’s burgers)
How we choose the optimal pricing strategy?
we need to be aware of :
1. the features of our product
2. habits of customers
3. competitors
what is a cost-plus pricing strategy?
when we add a fixed mark-up to the cost unit. based on costs. (ex: cost x 2.35)
What’s the break-even method for pricing?
We consider all type of costs to to find the brake-even point of the firm.
What’s the correlation index?
The correlation between prices and demand. -1 negative correlation; 1 positive correlation.
What’s the Lerner Index?
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.
What’s the Lerner Index formula
L= ( price - marginal cost) / price
What is group pricing?
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
What is the consumer surplus?
when the price the consumer pays is less than what they are willing to pay. (esta barato jaja)
example of group pricing.
- kids no paying
- student prices
- tourist price
- Hard or soft cover books
- 1st & 2nd class tickets
2 similar pricing schemes to personalized pricing.
- 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. - Block pricing:
Bundle of price & quantity
( $45 for the entrance and 3 drinks)
all this obviously matching their WTP.
- personalized discounts because these are considered less unfair.
What’s menu pricing?
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.
What are the concentration indexes?
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.
C2 Index
Sums the market share of the 2 biggest firms on the sector.
C4 Index
Sums the market share of the 4 biggest firms on the sector.
H.H.I index
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.
an example of non digital two sided market?
a mall
Examples of two sided markets.
Uber, whatsapp, Tinder, ebay, amazon, airbnb, booking, instagram…
What is strategic interaction?
When firms need to consider the rivals’ actions, strategies, prices, advertising, sales..
Common in oligopolistic traditional one sided markets.
What is game theory?
The study of multiperson decision problems. this theory assumes that each player want´s to maximize payoffs
Type of games in game theory.
- cooperative: collusion
- non cooperative: competition
- simultaneous
- sequential
An example of olipolistic market with no cooperation
smartphones
airlines
cars
The 3 basic oligopoly markets
Cournot= static competing over quantity (Nash E.)
Bertrand= static competing over price (Nash E.)
Stackelberg sequential competing over quantity. (backwards induction)
why h.h.i is better at measuring the competitiveness among industries?
because it provides a more detailed picture of the overall market concentration
