Week 5 - Pricing Flashcards
What is peak load pricing?
Why is it used?
Defined:
People charged more at times of high demand
used in times of high demand because MC normally increases + to extract more surplus
What is product line pricing?
Why is it used?
Defined:
introduction of new slightly different variations of a product
Prices differ to make customers self select their different elasticities of demand
What is intertemporal pricing?
Why is it used?
Defined:
Prices change over time
Used because people’s PED changes & costs are normally higher at launch
What is two-part tariff pricing?
What are it’s characteristics?
Defined:
Requires customers to pay access fee and usage of product
-Market power derives from switching costs
- Doesn’t work well in competitive markets
- Does not make superficial profits until usage fees extract surplus
How do you calculate optimal two-part tariff prices?
Unit price = MC + lump fee = CS
- access fee based on lowest consumer surplus
- access fee covers fixed costs
What is predatory pricing?
What are its characteristics?
Defined:
Firms charge below AC in one market by subsidising losses from another business segment
- Aim is to kill competition
- Consumers benefit in short-run until competition is killed and prices rise
What is multi-product pricing?
What are its characteristics?
Defined:
Bundling products together
Has a “lose leader” sold at or below cost price in order to attract customers
- loss leader has high PED
- used for complementary and substitutes goods
Describe the 4 phases of a products life-cycle
- Launch
- Firm normally has monopoly
- large economic profits
- Demand is inelastic - Growth stage
- economic profit decreases as competition enters market - Market Maturity
- competition continues to increase
- prices drop
- sales drop
- innovation occurs - Decline
- market reaches saturated
- no economic profit
- product becomes obsolete due to innovation unless collusion occurs
What is game theory?
What does it imply about participants?
Defined:
Examination of someone’s best strategy as a response to a competitor
implies:
A market where participants have market power
What are the 4 components of game theory?
Players
rules
strategy
payoffs
What is a simultaneous single-move game?
Game that only examines one move per game where participants move at the same time
What is a dominate strategy?
When a participant has a single best strategy regardless of other players decision
What is a dominate strategy game?
When both players have the same dominate strategy
What is a Nash equilibrium?
The matrix payoff position that results from both firms making their best decision
What is the cournot model?
A duopoly market game where one firm creates a reaction function and produced as a response to its competitor
