More Pricing Strategies for Firms with Market Power (Non-Linear Pricing) Flashcards
1
Q
What are the conditions for price discrimination?
A
- Firm must possess market power
- 2. Resale or arbitrage can be prevented
2
Q
What is the type of price discrimination possible depend on?
A
- The extent to which a firm can actually price discriminate depends on the information they have about the willingness to pay of consumers
3
Q
What is first degree price discrimination and what are the outcomes?
A
- aka perfect
- A firm has perfect information on the willingness to pay of each consumer
- The firm charges each consumer the maximum price he or she would be willing to pay for each unit of the good purchased
- the firm extracts all surplus from consumers and earns the highest possible profits
- Social welfare is maximised
4
Q
How can first degree price discrimination be achieved?
A
- Perfect price discrimination can be implemented ONLY when consumers have identical demands for a particular products
- The firm can set a two-part tariff {p, A}
- p* = MC, per unit price
- A*, a fixed fee, = CS
- The firm can extract all surplus
5
Q
What is 2nd degree price discrimination?
A
- The firm knows that the consumers differ in way important to the firm
- But unable to identify each individuals so as to be able to discriminate directly
- By using self selection mechanism, the firm may be able to extract more surplus
- Post a price menu and get consumers to self select and effectively reveal their types
6
Q
How can 2nd degree price discrimination be achieved?
A
- Menu pricing
- Versioning based on quality: free version, pro version
- Versioning based on time: books in hardcover, later in paperback; movies in theatres, later on DVD
- Versioning based on quantity: software site licenses, magazine subscriptions
- Two-Part Tariff
7
Q
How can two-part tariff’s be used to achieve 2nd degree price discrimination?
A
- Simplest second-degree price discrimination
- Used to discriminate between high and low demand consumers
- Type 2 has a higher demand and it’s demand curve is to the right of type 1s
- The firm knows this, but cannot distinguish between them
- Set p = MC
- Set A = consumer surplus of type 1 so that the firm serves both types
- The fixed fee is chosen to extract all the surplus from the low-demand consumer
- But not all the surplus from the high-demand consumer
8
Q
What is special about two-part tariffs in 2nd vs 1st degree price discrimination?
A
2 demand curves in 2nd
9
Q
What is 3rd degree price discrimination?
A
- The seller knows that some characteristics (observable to the firm) of buyers that are likely to affect their demand
- Students/elderly are likely to respond in a more elastic way to some goods
- Market segmentation can be implemented when the monopolist
- Knows the market demand curves for different groups
- Can stop arbitrage between groups
10
Q
What is the working and result in 3rd degree price discrimination?
A
- MC = MR in both markets
- The more elastic demand should face the lower price
- Single price would be between the two: welfare effect is ambiguous
- Depends on proportion of consumers
11
Q
What is Block pricing?
A
- Pricing strategy in which identical products are packages together in order to enhance profits by forcing customers to make an all-or-none deacon to purchase
- The profit maximising price on a package is the total value the consumer receives for the package
- Take it or leave it offer
12
Q
What is commodity bundling?
A
- The practice of bundling several different products together and selling them at a single bundle price
- Consumers differ with respect to the amounts they are willing to pay for multiple products sold by a firm
- Managers cannot observe different consumers valuations
13
Q
What are the requirements of commodity bundling?
A
- Only profitable when consumer has negative correlation in the valuation of the products
- Works better the higher the negative correlation
- Can charge average reservation prices instead according to the lowest
14
Q
What is peak loading pricing and what gives rise to it?
A
- Pricing strategy in which higher prices are charged during peak hours than during off peak hours
- According to normal profit max
- Peak load problem arises under conditions
- The firm produces in a number of time periods
- Demand cyclical, fluctuates in a predicable pattern
- The firm’s capacity over time is contained to be the same
- Output is not storable
15
Q
What are cross-subsidies?
A
- Pricing strategy in which profits gained from the sale of one product are used to subsidise sales of a related product
- When the demands for two products produces by a firm are interrelated through costs or demand, the firm may enhance profits by cross-subsidisation: selling one products at or below cost and the other product above cost
