Intermediate Microeconomics Chapter 12: Pricing and Advertising

- It charges a higher price to customers who are willing to pay more than the uniform price, capturing some or all of their consumer surplus.
- It also sells to some people who are not willing to pay as much as the uniform price.

- A firm must have market power.
- Consumers must differ in their sensitivity to price, and a firm must be able to identify how consumers differ in this sensitivity
- A firm must be able to prevent or limit resales

A situation in which a firm sells each unit at the maximum amount any customer is willing to pay for it, so prices differ across customers and a given customer may pay more for some units than for others

A situation in which a firm charges a different price for large quantities than for small quantities but all customers who buy a given quantity pay the same price.

A situation in which a firm charges different groups of customers different prices but charges a given customer the same price for every unit of output sold.

The maximum amount a person would be willing to pay for a unit of output

the firm charges each person his or her reservation price.

efficient and maximizes total welfare.

- perfect price discrimination equilibrium, only the last unit is sold at that price
- perfectly price-discriminating monopolies capture all the welfare

successive units: (the typical customer's demand curve is downward sloping)

Charge one price for the first few units (a block) and a different price for subsequent blocks.
- First 20: $70
- Second 20: $50
- Third 20: (no profit at $30)

divide potential customers into two or more groups and set a price for each group.

- to divide buyers into groups based on observable characteristics of consumers (age, income, location, ect., ...)
- or to identify and divide consumers on the basis of their actions

A type of pricing strategy in which customers can buy one product only if they agree to buy another product as well.

- A type of tie-in sale in which two goods are combined so that customers cannot buy either good separately.
- Bundling a pair of goods pays only if their demands are negatively correlated

raise its profits.

shifts the market demand curve by changing consumer's tastes or informing them about new products.

the firm's profit must rise.

it expects its net profit (gross profit minus the cost of advertising) to increase.