Theme 7 - Pricing strategies and price discrimination Flashcards
What is price discrimination?
Price discrimination means that different consumers are paying different prices for the same good or service for reasons not associated with the costs of production.
Each type of price discrimination requires that managers have different types of information about consumers.
One theater offers a 25% discount to students.
Students must pick up their tickets in person at the box office on the day of the play. Why is this required?
To avoid the resale of tickets that would render the price discrimination policy ineffective
What are the conditions necessary for price discrimination?
- Information about customers
- Market power
- Customers inability to resale the good
What is 1st degree price discrimination (perfect price discrimination)? What happens to the CS in this situation? Do you have some examples?
The monopolist charges each consumer a price that corresponds as closely as possible to the consumer’s valuation for the good.
By choosing this strategy, the firm captures the entire consumer surplus.
Examples?
Car dealers, Auctions, Sales in flea markets
What is 2nd degree price discrimination (implicit market segmentation)? Do you have some examples?
The monopolist charges different prices depending upon some non observable characteristics.
The firm offers a menu of different options to screen different types of consumers according to their valuations.
Segmentation is obtained through the choices the consumers make (customers self-select).
Strategy used often: block pricing
Examples: Cell phone plans, menus in restaurant, season tickets, pricing of airplanes
What is 3rd degree discrimination (explicit market segmentation)? Do you have some examples?
Consumers can be differentiated according to observable characteristics.
Logic: if the demand curves differ across different market segments, it is profitable to charge different prices taking into account those differences.
Examples:Rebates or lower prices for students, seniors kids, prices for women/men, geographic price discrimination (different valuations for the good)
What is a two-part tariff? Do you have some examples?
The price charged to the consumer is composed of 2 parts :
T: Lump-sum fee
Set the lump-sum fee equal to the CS when he buys the optimal number of good at the per-unit price.
P: Per-unit price (proportional to the quantity purchased)
Set the per-unit price equal to the MC.
Examples:
Costco: a membership (fixed fee annually and you pay for the quantity purchased)
Golf clubs: membership fees and rates for rounds of golf
What is the optimal strategy for 3rd degree discrimination?
The optimal strategy is to :
Increase the price for the segment with the less elastic demand, that is for students
Decrease the price of the segment with the more elastic demand, that is for general population
Using this pricing strategy, profit will be higher.
What is the “tying” strategy? Do you have some examples?
Tying consists in selling different products together to capture a larger portion of the consumer surplus.
Examples: Printers and ink cartridges, Nespresso machines and the ”capsules”, Kindle reader and amazon books, Cell phone and cell plans
What is the “bundling” strategy? Do you have some examples?
Bundling consists in selling a bundle of goods or services at a lower price than the consumer would pay by buying all goods individually.
Examples: Microsoft office suite, Cable TV : bundle of TV channels, All inclusive travel package
