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Price Discrimination
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practice of changing different prices for the good when the differential does not reflect cost differences
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third degree price discrimination
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charge different groups of consumers a different price
To be successful:
- must be able to distinguish the diff. groups
- no resale is allowed
To be successful:
- must be able to distinguish the diff. groups
- no resale is allowed
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Two-part pricing
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2 prices/fees
- upfront fee (for the privilege of being able to purchase the product, T)
- per unit price to buy the product, P
- upfront fee (for the privilege of being able to purchase the product, T)
- per unit price to buy the product, P
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block pricing
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identical products are packaged together & the package is then sold
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If there are a larger # of firms...
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less markup
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The more elastic the market demand is...
answer
less markup
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The greater MC is...
answer
higher price
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2nd degree price discrimination
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-consumers buy varying quantities
-schedule of prices
Refer to graph for further info. regarding which prices to charge for different criteria involving Q
-schedule of prices
Refer to graph for further info. regarding which prices to charge for different criteria involving Q
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1st degree price discrimination
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charges each consumer his or her reservation price
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Reservation price
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the max amount that consumers will buy at to buy the good being sold
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bundling
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package different items together and sell the package
*Note: makes sense when:
1) consumers have heterogeneous demands for the product
2) cannot price discriminate
*Note: makes sense when:
1) consumers have heterogeneous demands for the product
2) cannot price discriminate
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If you sell individually...
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reservation price determines if consumers will buy the product
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If you sell bundle...
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-can sell more product highly effective when reservation price highly negatively correlated
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Transfer pricing
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set transfer price such that with profit maximization by all divisions in the company, overall profit is mazimized
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cross subsidy
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-2 products with cost complementaries
-demand for the product is inter-related
-can change a low price for 1 good and a high price for the other
ex. restaurants charge low price for food but high price for drinks
-demand for the product is inter-related
-can change a low price for 1 good and a high price for the other
ex. restaurants charge low price for food but high price for drinks
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To earn higher profits, markets with intense competition can...
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1) Price match
2) Randomize pricing
2) Randomize pricing
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Price-matching
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advertise for a price for the product AND guarantee to match for any lower prices by competitors
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Benefits of price-matching
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-implication other competitors cannot beat your price -> increase customer base, creating more satisfied customers
-don't have to do anything; customers bring info to you
-don't have to do anything; customers bring info to you
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For price-matching to be effective:
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1) requires mechanism to guarantee customer's claims
2) be careful about cost structures (competitors might have lower price -> can charge a lower price)
2) be careful about cost structures (competitors might have lower price -> can charge a lower price)
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Randomized pricing
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intentionally vary price(s)
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Benefits/Reasons to randomize pricing
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1) prevents consumers from shopping around
2) prevents rivals from knowing prices (competitors will not know how to compete)
3) eliminates perfect info. (producers know more than consumers)
*Note: a challenge is that this increases costs
2) prevents rivals from knowing prices (competitors will not know how to compete)
3) eliminates perfect info. (producers know more than consumers)
*Note: a challenge is that this increases costs
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limit pricing
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lower the price to discourage entry
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Issues to limit pricing:
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1) Fail to deter entry (credibility issues)
2) Learning curve effects (other firm may outperform monopolist)
3) Commitment mechanisms
4) Incomplete info
5) Reputation effects (be tough on other firms from the start)
6) Dynamic considerations (profit may lower due to limit pricing) -> Consider to engage or not to engage
2) Learning curve effects (other firm may outperform monopolist)
3) Commitment mechanisms
4) Incomplete info
5) Reputation effects (be tough on other firms from the start)
6) Dynamic considerations (profit may lower due to limit pricing) -> Consider to engage or not to engage
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Predatory pricing is a strategy
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whereby a firm temporarily prices below its marginal cost to drive competitors out of
the market
the market
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If firms are in Cournot equilibrium:
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firms could increase profits by jointly reducing output.
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It is profitable to hire labor so long as the:
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VMPL is greater than wage
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common to both perfectly competitive markets and
monopolistically competitive markets
monopolistically competitive markets
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Long-run profits are zero.
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A firm will maximize the present value of future profits by maximizing current profits
when the:
when the:
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interest rate is larger than the growth rate in profits and both are constant.
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Under producer-producer rivalry, individual firms want to sell the product at the
maximum price consumers will pay, but they are unable to do this because of:
maximum price consumers will pay, but they are unable to do this because of:
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competition among sellers.
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The disadvantage of vertical integration is that:
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. firms no longer specialize in what they do best.
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Which firm would you expect to make the lowest profits, other things equal?
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Bertrand oligopolist
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The equilibrium consumption bundle is:
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the affordable bundle that yields the greatest satisfaction to the consumer.
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The products in a monopolistically competitive industry are:
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heterogeneous
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Firms that use a price-matching strategy attempt to keep price at:
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the monopoly price
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Engaging in predatory pricing is always more profitable than permitting existing firms
to remain in the market.
to remain in the market.
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false
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Being the first mover is always best.
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false
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It is always more profitable to engage in limit pricing than to permit entry
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false
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normal good, what do you suppose would happen to price and quantity
during an economic recession?
during an economic recession?
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Price and quantity would both decrease.
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Long-term contracts become longer:
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when specialized investment becomes more important.
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An oligopolist faces a demand curve that is steeper at lower prices than at higher prices.
Which of the following is most likely?
Which of the following is most likely?
answer
Other firms match price reductions but do not match price increases.
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