1、Chapter 11 Pricing with Market Power Chapter 11Slide 2 Topics to be Discussed nCapturing Consumer Surplus nPrice Discrimination nIntertemporal Price Discrimination and Peak-Load Pricing Chapter 11Slide 3 Topics to be Discussed nThe Two-Part Tariff nBundling nAdvertising Chapter 11Slide 4 Introductio
2、n nPricing without market power (perfect competition) is determined by market supply and demand. nThe individual producer must be able to forecast the market and then concentrate on managing production (cost) to maximize profits. Chapter 11Slide 5 Introduction nPricing with market power (imperfect c
3、ompetition) requires the individual producer to know much more about the characteristics of demand as well as manage production. Chapter 11Slide 6 Capturing Consumer Surplus Quantity $/Q D MR Pmax MC If price is raised above P*, the firm will lose sales and reduce profit. PC PC is the price that wou
4、ld exist in a perfectly competitive market. A P* Q* P1 Between 0 and Q*, consumers will pay more than P*-consumer surplus (A). B P2 Beyond Q*, price will have to fall to create a consumer surplus (B). Chapter 11Slide 7 Capturing Consumer Surplus P*Q*: single P more elastic Group 2: P2Q2; more inelas
5、tic MR1 = MR2 = MC QT control MC Q1 P1 MC = MR1 at Q1 and P1 Chapter 11Slide 31 No Sales to Smaller Market Even if third-degree price discrimination is feasible, it doesnt always pay to sell to both groups of consumers if marginal cost is rising. Chapter 11Slide 32 No Sales to Smaller Market Quantit
6、y D2 MR2 $/Q MC D1 MR1Q* P* Group one, with demand D1, are not willing to pay enough for the good to make price discrimination profitable. Chapter 11Slide 33 The Economics of Coupons and Rebates nThose consumers who are more price elastic will tend to use the coupon/rebate more often when they purch
7、ase the product than those consumers with a less elastic demand. nCoupons and rebate programs allow firms to price discriminate. Price Discrimination Chapter 11Slide 34 Price Elasticities of Demand for Users Versus Nonusers of Coupons Toilet tissue-0.60-0.66 Stuffing/dressing-0.71-0.96 Shampoo-0.84-
8、1.04 Cooking/salad oil-1.22-1.32 Dry mix dinner-0.88-1.09 Cake mix-0.21-0.43 Price Elasticity ProductNonusersUsers Chapter 11Slide 35 Cat food-0.49-1.13 Frozen entre-0.60-0.95 Gelatin-0.97-1.25 Spaghetti sauce-1.65-1.81 Crme rinse/conditioner-0.82-1.12 Soup-1.05-1.22 Hot dogs-0.59-0.77 Price Elastic
9、ity ProductNonusersUsers Price Elasticities of Demand for Users Versus Nonusers of Coupons Chapter 11Slide 36 The Economics of Coupons and Rebates nCake Mix lNonusers of coupons: PE = -0.21 lUsers: PE = -0.43 Chapter 11Slide 37 The Economics of Coupons and Rebates nCake Mix Brand (Pillsbury) lPE: 8
10、to 10 times cake mix PE nExample lPE Users: -4 lPE Nonusers: -2 Chapter 11Slide 38 The Economics of Coupons and Rebates nUsing: nPrice of nonusers should be 1.5 times users lOr, if cake mix sells for $1.50, coupons should be 50 cents )11 ( )11 ( 1 2 2 1 E E P P Chapter 11Slide 39 Airline Fares nDiff
11、erences in elasticities imply that some customers will pay a higher fare than others. nBusiness travelers have few choices and their demand is less elastic. nCasual travelers have choices and are more price sensitive. Chapter 11Slide 40 Elasticities of Demand for Air Travel Price-0.3-0.4-0.9 Income1
12、.21.21.8 Fare Category ElasticityFirst-ClassUnrestricted CoachDiscount Chapter 11Slide 41 Airline Fares nThe airlines separate the market by setting various restrictions on the tickets. lLess expensive: notice, stay over the weekend, no refund lMost expensive: no restrictions Chapter 11Slide 42 Inte
13、rtemporal Price Discrimination and Peak-Load Pricing nSeparating the Market With Time lInitial release of a product, the demand is inelastic uBook uMovie uComputer Chapter 11Slide 43 nSeparating the Market With Time lOnce this market has yielded a maximum profit, firms lower the price to appeal to a
14、 general market with a more elastic demand uPaper back books uDollar Movies uDiscount computers Intertemporal Price Discrimination and Peak-Load Pricing Chapter 11Slide 44 Intertemporal Price Discrimination Quantity AC = MC $/Q Over time, demand becomes more elastic and price is reduced to appeal to
15、 the mass market. Q2 MR2 D2 = AR2 P2 D1 = AR1MR1 P1 Q1 Consumers are divided into groups over time. Initially, demand is less elastic resulting in a price of P1 . Chapter 11Slide 45 nDemand for some products may peak at particular times. lRush hour traffic lElectricity - late summer afternoons lSki
16、resorts on weekends Intertemporal Price Discrimination and Peak-Load Pricing Peak-Load Pricing Chapter 11Slide 46 nCapacity restraints will also increase MC. nIncreased MR and MC would indicate a higher price. Peak-Load Pricing Intertemporal Price Discrimination and Peak-Load Pricing Chapter 11Slide
17、 47 nMR is not equal for each market because one market does not impact the other market. Peak-Load Pricing Intertemporal Price Discrimination and Peak-Load Pricing Chapter 11Slide 48 MR1 D1 = AR1 MC P1 Q1 Peak-load price = P1 . Peak-Load Pricing Quantity $/Q MR2 D2 = AR2 Off- load price = P2 . Q2 P
18、2 Chapter 11Slide 49 How to Price a Best Selling Novel nWhat Do You Think? 1) How would you arrive at the price for the initial release of the hardbound edition of a book? Chapter 11Slide 50 How to Price a Best Selling Novel nWhat Do You Think? 2) How long do you wait to release the paperback editio
19、n? Could the popularity of the book impact your decision? Chapter 11Slide 51 nWhat Do You Think? 3) How do you determine the price for the paperback edition? How to Price a Best Selling Novel Chapter 11Slide 52 The Two-Part Tariff nThe purchase of some products and services can be separated into two
20、 decisions, and therefore, two prices. Chapter 11Slide 53 The Two-Part Tariff nExamples 1) Amusement Park uPay to enter uPay for rides and food within the park 2) Tennis Club uPay to join uPay to play Chapter 11Slide 54 The Two-Part Tariff nExamples 3) Rental of Mainframe Computers uFlat Fee uProces
21、sing Time 4) Safety Razor uPay for razor uPay for blades Chapter 11Slide 55 The Two-Part Tariff nExamples 5) Polaroid Film uPay for the camera uPay for the film Chapter 11Slide 56 The Two-Part Tariff nPricing decision is setting the entry fee (T) and the usage fee (P). nChoosing the trade-off betwee
22、n free- entry and high use prices or high-entry and zero use prices. Chapter 11Slide 57 Usage price P*is set where MC = D. Entry price T* is equal to the entire consumer surplus. T* Two-Part Tariff with a Single Consumer Quantity $/Q MC P* D Chapter 11Slide 58 D2 = consumer 2 D1 = consumer 1 Q1Q2 Th
23、e price, P*, will be greater than MC. Set T* at the surplus value of D2.T* Two-Part Tariff with Two Consumers Quantity $/Q MC A B C ABC e than twicmore )()(2 21 * QQxMCPT Chapter 11Slide 59 The Two-Part Tariff nThe Two-Part Tariff With Many Different Consumers lNo exact way to determine P* and T*. l
24、Must consider the trade-off between the entry fee T* and the use fee P*. uLow entry fee: High sales and falling profit with lower price and more entrants. Chapter 11Slide 60 The Two-Part Tariff nThe Two-Part Tariff With Many Different Consumers lTo find optimum combination, choose several combinatio
25、ns of P,T. lChoose the combination that maximizes profit. Chapter 11Slide 61 Two-Part Tariff with Many Different Consumers T Profit a :entry fee s :sales Total T* Total profit is the sum of the profit from the entry fee and the profit from sales. Both depend on T. entrantsn nQMCPTTn sa )()()( Chapte
26、r 11Slide 62 The Two-Part Tariff nRule of Thumb lSimilar demand: Choose P close to MC and high T lDissimilar demand: Choose high P and low T. Chapter 11Slide 63 The Two-Part Tariff nTwo-Part Tariff With A Twist lEntry price (T) entitles the buyer to a certain number of free units uGillette razors wi
27、th several blades uAmusement parks with some tokens uOn-line with free time Chapter 11Slide 64 Polaroid Cameras n1971 Polaroid introduced the SX-70 camera nWhat Do You Think? lHow would you price the camera and film? Chapter 11Slide 65 Polaroid Cameras nHint cameras producing of cost film producing
28、of cost sold cameras of number sold film ofquantity camera of price film of price )( )( )()( 2 1 21 nC QC n Q T P nCQCnTPQ Chapter 11Slide 66 Pricing Cellular Phone Service nQuestion lWhy do cellular phone providers offer several different plans instead of a single two-part tariff with an access fee
29、 and per- unit charge? Chapter 11Slide 67 Bundling nBundling is packaging two or more products to gain a pricing advantage. nConditions necessary for bundling lHeterogeneous customers lPrice discrimination is not possible lDemands must be negatively correlated Chapter 11Slide 68 Bundling nAn example
30、: Leasing “Gone with the Wind” 10( to AP EE ); 5(smallvery AP EE ) 13 .; 43( to to AP EE ) ; 43( largevery to A P E E Chapter 11Slide 110 Summary nFirms with market power are in an enviable position because they have the potential to earn large profits, but realizing that potential may depend critic
31、ally on the firms pricing strategy. nA pricing strategy aims to enlarge the customer base that the firm can sell to, and capture as much consumer surplus as possible. Chapter 11Slide 111 Summary nIdeally, the firm would like to perfectly price discriminate. nThe two-part tariff is another means of c
32、apturing consumer surplus. nWhen demands are heterogeneous and negatively correlated, bundling can increase profits. Chapter 11Slide 112 Summary nBundling is a special case of tying, a requirement that products be bought or sold in some combination. nAdvertising can further increase profits. End of Chapter 11 Pricing with Market Power
