Price Discrimination Definition: A monopolist charges a uniform price if it sets the same price for every unit of output sold.. Forms of Price Discrimination Definition: A policy of fir
Trang 2Chapter Twelve Overview
1.Introduction: Airline Tickets
• Package Tie-ins (Bundling)
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Trang 3Uniform Price Vs Price Discrimination
Definition: A monopolist charges a uniform price if it
sets the same price for every unit of output sold.
While the monopolist captures profits due to an optimal uniform pricing policy, it does not receive the consumer surplus or dead-weight loss associated with this policy.
The monopolist can overcome this by charging more than one price for its product
Definition: A monopolist price discriminates if it
charges more than one price for the same good or service.
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Trang 4Forms of Price Discrimination
Definition: A policy of first degree (or perfect) price
discrimination prices each unit sold at the consumer's
maximum willingness to pay This willingness to pay is directly observable by the monopolist
Definition: A policy of second degree price discrimination
allows the monopolist to offer consumers a quantity discount
Definition: A policy of third degree price discrimination offers a
different price for each segment of the market (or each consumer group) when membership in a segment can be
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Trang 5“Willingness to Pay” Curve
Definition: The consumer's maximum
willingness to pay is called the consumer's reservation price.
Think of the demand curve as a "willingness to pay" curve If the monopolist can observe the willingness to pay of each customer (based on, for example, residence, education,
"look", etc), then the monopolist can observe demand perfectly and can "perfectly" price discriminate
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Trang 6Forms of Price Discrimination
Definition: A policy of first degree (or perfect) price
discrimination prices each unit sold at the
consumer's maximum willingness to pay This willingness to pay is directly observable by the monopolist.
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Trang 7D
MC P1
MR
Quantity
Uniform Price Monopoly 1st Degree P.D Monopoly
Uniform Price Vs Price Discrimination
Price
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Trang 8Therefore, a perfectly price discriminating
monopolist will produce and sell the efficient
Trang 9Copyright (c)2014 John Wiley & Sons, Inc.
Trang 10Pricing Surplus – Monopoly
What will producer surplus be if the monopolist perfectly price discriminates?
P = MC => 20 - Q = 2 =>Q* = 18
Revenue - TVC = [18(20-2)(1/2) + 18(2) = 162
18(2)]-This is a gain in captured surplus of 81!
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Trang 11First Degree Price Discrimination
What is the marginal revenue curve for a perfectly price discriminating monopolist?
When the monopolist sells an additional unit,
it does not have to reduce the price on the other units it is selling Therefore, MR = P (i.e., the marginal revenue curve equals the demand curve.)
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Trang 12Definition: A policy of second degree price
discrimination allows the monopolist to
charge a different price to different consumers While different consumers pay different prices, the reservation price of any one consumer cannot be directly observed
Second Degree Price Discrimination
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Trang 13Two Part Tariff
Definition: A monopolist charges a two part
tariff if it charges a per unit fee, r, plus a lump sum fee (paid whether or not a positive number
of units is consumed), F
This, effectively, charges demanders of a low quantity a different average price than demanders of a high quantity
Example: hook-up charge plus usage fee for a telephone, club membership, or the like
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Trang 1410 0
Two Part Tariff
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Trang 15Two Part Tariff
What is the optimal two-part tariff?
Two steps:
(1) maximize the benefits to the consumers by charging r = MC = 10
(2) capture this benefit by setting F = consumer benefits = 4050
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Trang 16Two Part Tariff
Any higher usage charge would result in a weight loss that could not be captured by the monopolist Any lower usage charge would result in selling at less than marginal cost
dead-In essence, the monopolist maximizes the size of the "pie", then sets the lump sum fee so as to capture the entire "pie" for itself.
The total surplus captured is the same as in the case of perfect price discrimination.
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Trang 17Block Tariff
Definition: If a consumer pays one price for one block of output and another price for another block of output, the
consumer faces a block tariff
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Trang 18Copyright (c)2014 John Wiley & Sons, Inc.
Trang 19and we must choose Q1 and Q2 to maximize this profit…
MR1 = (100 - Q1) - Q1 - (100 - Q2) = 0
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Trang 21100
40 70 100
Block Pricing
Quantity Discrimination
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Trang 22Block Pricing
If the monopolist could set a different block price for each customer, it would capture the same amount of surplus as a perfectly price discriminating monopolist.
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Trang 24P1 P2
Additional CS
MC Additional PS
D - small D - large
Utility Pricing
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Trang 25Third Degree Price Discrimination
Definition: A policy of third degree price
discrimination offers a different price for each
segment of the market (or each consumer group) when membership in a segment can be observed
Example: Movie ticket sales to older people or students at discount
• Suppose that marginal costs for the two markets are the same How does a monopolist maximize profit with this type of price discrimination?
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Trang 26Set the marginal revenue in each market equal to marginal cost (i.e., the monopolist maximizes total profits by maximizing profits from each group individually.)
This implies that MR1 = MC = MR2 at the optimum Otherwise, the monopolist could raise revenues by switching sales from the low MR group to the high MR group.
MC = AC = 20 P1 = 100 - Q1
Optimal Pricing
Example
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Trang 27MR1 = 100 - 2Q1 = MC = 20MR2 = 80 - 4Q2 = MC = 20
Q1* = 40Q2* = 15
P1* = 60P2* = 50
Optimal Pricing
Example
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Trang 2880 50
P
Demand 2
100
20 60
Trang 29Tie-in Sales – Requirements
Definition: A tie-in sale occurs if customer can
buy one product only if they agree to purchase another product as well
• Requirements tie-in sales occur when
a firm requires customers who buy one product from the firm to buy another product from the firm.
A requirements tie-in sale may be used
in place of price discrimination when the firm cannot observe the relative willingness to pay of different customers.
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Trang 30Tie-in Sales – Bundling
• Package tie-in sales (or bundling) occur
when goods are combined so that customers cannot buy either good separately.
Bundling may be used in place of price discrimination to increase producer surplus when consumers have different willingness to pay for the goods sold in the bundle.
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Trang 31Tie-in Sales – Bundling
Negatively Correlated Preferences
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Trang 32Tie-in Sales – Bundling
Optimal Pricing Policy
Without bundling: pc = $1500
pm = $600
• Profit cm = $800 With bundling: pb = $1800
• Profit b = $1000
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Trang 33Tie-in Sales – Bundling
Positively Correlated Preferences
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Reservation Price Computer Monitor Customer 1 $1,200 $400 Customer 2 $1,500 $600 Marginal Cost $1,000 $300
Trang 34Tie-in Sales – Bundling
Optimal Pricing Policy
Without bundling: pc = $1500 pm = $600
• Profit cm = $800 With bundling: pb = $2100
• Profit b = $800
In general, bundling a pair of goods only pays if their demands are negatively correlated (customers who are willing to
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Trang 35Reservation Price
The reason is that the price is determined by the purchaser with the lowest reservation price
If reservation prices for the two goods are negatively correlated, bundling reduces the dispersion of reservation prices and so raises the price at which additional units can be sold
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