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Price Discrimination Flashcards

1
Q

Price Discrimination

A

a. Different units of a product are sold at different prices
b. Exploits differences in utility / willingness-to-pay
c. Goal: generate higher profit

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2
Q

Degrees of Price Discrimination (Pigou):

A

a. First degree: each customer pays as much as she is willing to pay (= perfect price discrimination)
b. Second degree: different prices are offered, and each customer self-selects one
c. Third degree: the company identifies and separates segments, and offers different prices to these segments

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3
Q

Types of Price Discrimination

A
  1. 1st degree - Negotiations, Auctions
  2. 2nd degree - Performance-based, Volume-based (nonlinear pricing), Regional
  3. 3rd degree - Regional, Person-based, Time-based, Multi-person pricing
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4
Q

Price Discrimination Based on Customer Segments

A
  1. Customers / segments differ in their willingness-to-pay
  2. Aggregation across customers results in the following price response function for the complete market: Q = 100 – 10 ∙ P
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5
Q

Price Discrimination Based on Customer Segments - Success factors

A

a. Information about the willingness-to-pay of different customers / segments
b. Ability to separate customers / segments (avoid arbitrage)

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6
Q

Bundling

A
  1. Bundling = Sales of different products as a bundle
  2. Types:
    a. Pure bundling
    b. Mixed bundling
  3. Examples:
    a. Opera: Season ticket
    b. Restaurant: 3 course menu
    c. Vacation package: flight + hotel
    d. Trade show: booth space + services for exhibitors
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7
Q

Profitability of Bundling

A

a. Takes advantage of the asymmetry of willingness-to-pay
b. Additional utility through integration of products
e. g., purchase of booth & services as a bundle
c. Cost advantages
d. Price perception (integration of losses)

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8
Q

Pure vs. Mixed Bundling

A
  1. Mixed bundling often more profitable
    a. Fewer legal restrictions
    b. Higher profit, if
    i. Willingness-to-pay differs across customers
    ii. Competition
  2. Pure Bundling more profitable for new products
    a. –> brings all customers in contact with the new product
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9
Q

Nonlinear Pricing - general idea

A

a. Price per unit is different for different quantities
b. Second degree price discrimination (customers choose which quantity to buy)
c. Profitable because marginal utility decreases with increasing quantity

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10
Q

Nonlinear Pricing - Forms

A

a. Flat rate
b. All-units quantity discount
c. Two-part tariff
d. Optional (block) tariff
e. Price points

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11
Q

Biases in Tariff Choice

A
  1. Assumption so far: Customers maximize their consumer surplus
  2. However:
    a. Some customers choose a flate rate, although they would pay less with a linear tariff (given the same number of articles).
    b. Other customers prefer a linear tariff, although they would pay less with a flat rate.
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12
Q

Causes of

A

Causes of a flat rate bias:

a. Taxi meter effect
b. Self-control effect
c. Insurance effect
d. Habit effect

Causes of a Pay-per-use bias:

a. Flexibility effect
b. Habit effect

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13
Q

Implementation of Price Discrimination

A
  1. Avoid arbitrage, e.g.,
    a. Exporting (discrimination by country)
    b. Resale by the buyers (nonlinear pricing)
  2. Measurement of willingness-to-pay at the individual level (nonlinear pricing: for different numbers of units)
  3. Optimization
  4. Communication
  5. Competitive reactions
  6. Legal aspects
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14
Q

Methods for Measuring Individual Willingness to pay

A
  1. Transaction Data:
    a. Actual market transactions
    b. Simulated test markets
  2. Survey Data / Auctions / Lotteries:
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15
Q

Direct Elicitation

A

a. Open Ended: „How much are you willing to pay for product X? _______ €“
b. Closed Ended: „ Would you buy product X at the following prices?
i. 2.00 € yes/no
ii. 2.50 € yes/no
iii. 3.00 € yes/no
iv. …
c. Problems:
i. Difficult to state WTP directly (easier to trade-off with other product attributes)
ii. Hypothetical bias

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16
Q

Conjoint Analysis – Basics

A

a. Indirect Measurement of preferences: Trade-offs between product attributes
i. e.g.: What‘s more important – a lower price or a preferred brand?
b. Assumption: additive utility function
i. total utility = sum of part-worths for attribute levels
c. Products are presented to consumers who rank / rate / choose
i. derive preferences for attributes and their levels
d. Procedure:
i. Choose attributes and their levels
ii. Design stimuli
iii. Let respondents evaluate stimuli –> different types of conjoint analysis
iv. Estimate utility function

17
Q

Types of Conjoint Analysis

A

a. Traditional conjoint analysis
i. Respondents rank order or rate stimuli
ii. Hardly used any more

b. Choice-based conjoint analysis (CBC)
i. Respondents choose one product from a choice set (no-choice option necessary for determining WTP)
ii. More realistic task than ranking or rating

c. Adaptive Conjoint Analysis (ACA)
i. 1st step: direct elicitation (= self-explicated approach) –> choose most important attributes
ii. 2nd step: conjoint analysis with pairwise comparisons
iii. Used when many attributes are relevant

18
Q

Vickrey Auctions

A

a. Traditional auctions:
i. English auction: increasing bids, highest bidder wins
ii. Dutch auction: lower price until first bidder accepts
iii. Problem: no incentive to bid true WTP
b. Vickrey auction (Vickrey 1961) = sealed bid second price auction
i. All bidders hand in a sealed bid
ii. The highest bidder wins
iii. Price for winner = second highest bid
c. Vickrey auction is incentive compatible
i. –> bidders have incentive to bid true WTP

19
Q

BDM

A

a. Procedure:
i. Participant states his WTP
ii. Lottery determines price
iii. If price < stated WTP, participant has to buy product for this price
b. Properties:
i. Incentive-compatible like Vickrey auction
ii. Easier to apply because each participant can be surveyed individually

20
Q

Incentive-Aligned CBC

A

a. Procedure
i. Explain procedure to respondents
ii. Elicit preferences with CBC
iii. Use estimated part-worths to determine WTP for a real product
iv. Apply BDM to determine if and at what price respondent has to purchase product
b. Properties:
i. Incentive compatible like Vickrey auction and BDM
ii. Indirect measurement of WTP

21
Q

Drivers & Implication

A
  1. Drivers: „hypothetical bias“ is larger for …
    a. Indirect measurement than for direct measurement
    b. Products with higher value
    c. Specialty goods > shopping goods > convenience goods
  2. Implication: Direct measurement seems to work well in practice, even though indirect measurement is more theoretically sound!

Price Management (8 decks)

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