1、Chapter 11Pricing with Market PowerChapter 11Slide 2Topics to be DiscussednCapturing Consumer SurplusnPrice DiscriminationnIntertemporal Price Discrimination and Peak-Load PricingChapter 11Slide 3Topics to be DiscussednThe Two-Part TariffnBundlingnAdvertisingChapter 11Slide 4IntroductionnPricing wit
2、hout 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 5IntroductionnPricing with market power(imperfect competition)requires the
3、 individual producer to know much more about the characteristics of demand as well as manage production.Chapter 11Slide 6Capturing Consumer SurplusQuantity$/QDMRPmaxMCIf price is raised above P*,the firm will lose sales and reduce profit.PCPC is the pricethat would exist ina perfectly competitivemar
4、ket.AP*Q*P1Between 0 and Q*,consumerswill pay more than P*-consumer surplus(A).BP2Beyond Q*,price willhave to fall to create a consumer surplus(B).Chapter 11Slide 7Capturing Consumer SurplusP*Q*:single P&Q MC=MRA:consumer surplus with P*B:PMC&consumer would buy at a lower priceP1:less sales and prof
5、itsP2:increase sales&and reduce revenue and profitsPC:competitive priceQuantity$/QDMRPmaxMCPCAP*Q*P1BP2Chapter 11Slide 8Capturing Consumer SurplusQuantity$/QDMRPmaxMCPCAP*Q*P1BP2QuestionHow can the firmcapture the consumer surplusin A and sell profitably in B?AnswerPrice discriminationTwo-part tarif
6、fsBundlingChapter 11Slide 9Capturing Consumer SurplusnPrice discrimination is the charging of different prices to different consumers for similar goods.Chapter 11Slide 10Price DiscriminationnFirst Degree Price DiscriminationlCharge a separate price to each customer:the maximum or reservation price t
7、hey are willing to pay.Chapter 11Slide 11P*Q*Without price discrimination,output is Q*and price is P*.Variable profit is the area between the MC&MR(yellow).Additional Profit From Perfect First-Degree Price DiscriminationQuantity$/QPmaxWith perfect discrimination,eachconsumer pays the maximumprice th
8、ey are willing to pay.Consumer surplus is the area above P*and between0 and Q*output.D=ARMRMCOutput expands to Q*and pricefalls to PC where MC=MR=AR=D.Profits increase by the area above MCbetween old MR and D to outputQ*(purple)Q*PCChapter 11Slide 12P*Q*Consumer surplus when a single price P*is char
9、ged.Variable profit when a single price P*is charged.Additional profit fromperfect price discriminationQuantity$/QPmaxD=ARMRMCQ*PCWith perfect discrimination Each customer pays their reservation priceProfits increaseAdditional Profit From Perfect First-Degree Price DiscriminationChapter 11Slide 13nQ
10、uestionlWhy would a producer have difficulty in achieving first-degree price discrimination?nAnswer1)Too many customers(impractical)2)Could not estimate the reservation price for each customerAdditional Profit From Perfect First-Degree Price DiscriminationChapter 11Slide 14Price DiscriminationnFirst
11、 Degree Price DiscriminationlThe model does demonstrate the potential profit(incentive)of practicing price discrimination to some degree.Chapter 11Slide 15Price DiscriminationnFirst Degree Price DiscriminationlExamples of imperfect price discrimination where the seller has the ability to segregate t
12、he market to some extent and charge different prices for the same product:uLawyers,doctors,accountantsuCar salesperson(15%profit margin)uColleges and universitiesChapter 11Slide 16First-Degree PriceDiscrimination in PracticeQuantityDMRMC$/QP2P3P*4P5P6P1Six prices exist resultingin higher profits.Wit
13、h a single priceP*4,there are few consumers andthose who pay P5 or P6 may have a surplus.QSecond-Degree Price DiscriminationQuantity$/QDMRMCACP0Q0Without discrimination:P=P0 and Q=Q0.With second-degreediscrimination there are threeprices P1,P2,and P3.(e.g.electric utilities)P1Q11st BlockP2Q2P3Q32nd
14、Block 3rd BlockSecond-degree pricediscrimination is pricingaccording to quantityconsumed-or in blocks.Second-Degree Price DiscriminationQuantity$/QDMRMCACP0Q0P1Q11st BlockP2Q2P3Q32nd Block 3rd BlockEconomies of scale permit:Increase consumer welfareHigher profitsChapter 11Slide 19Price Discriminatio
15、nnThird Degree Price Discrimination1)Divides the market into two-groups.2)Each group has its own demand function.Chapter 11Slide 20Price DiscriminationnThird Degree Price Discrimination3)Most common type of pricediscrimination.uExamples:airlines,liquor,vegetables,discounts to students and senior cit
16、izens.Chapter 11Slide 21Price DiscriminationnThird Degree Price Discrimination4)Third-degree price discrimination is feasible when the seller can separate his/her market into groups who have different price elasticities of demand(e.g.business air travelers versus vacation air travelers)Chapter 11Sli
17、de 22Price DiscriminationnThird Degree Price DiscriminationlObjectivesuMR1=MR2uMC1=MR1 and MC2=MR2uMR1=MR2=MCChapter 11Slide 23Price DiscriminationnThird Degree Price DiscriminationlP1:price first grouplP2:price second grouplC(Qr)=total cost of QT=Q1+Q2lProfit()=P1Q1+P2Q2-C(Qr)Chapter 11Slide 24Pric
18、e DiscriminationnThird Degree Price DiscriminationlSet incremental for sales to group 1=0l l 0(11)111QCQQPQMCQCMRQQP11111)(Chapter 11Slide 25Price DiscriminationnThird Degree Price DiscriminationlSecond group of customers:MR2=MClMR1=MR2=MC Chapter 11Slide 26Price DiscriminationnThird Degree Price Di
19、scriminationlDetermining relative pricesl )11()11(11222111EPMREPMREPMRd:Then:RecallChapter 11Slide 27Price DiscriminationnThird Degree Price DiscriminationlDetermining relative pricesl lPricing:Charge higher price to group with a low demand elasticity)11()11(1221EEPP:AndChapter 11Slide 28Price Discr
20、iminationnThird Degree Price DiscriminationlExample:E1=-2&E2=-4 l lP1 should be 1.5 times as high as P25.12143)211()411(21PP Chapter 11Slide 29Third-Degree Price DiscriminationQuantityD2=AR2MR2$/QD1=AR1MR1Consumers are divided intotwo groups,with separatedemand curves for each group.MRTMRT=MR1+MR2Ch
21、apter 11Slide 30Third-Degree Price DiscriminationQuantityD2=AR2MR2$/QD1=AR1MR1MRTMCQ2P2QTQT:MC=MRTGroup 1:P1Q1;more elasticGroup 2:P2Q2;more inelasticMR1=MR2=MCQT control MCQ1P1MC=MR1 at Q1 and P1Chapter 11Slide 31No Sales to Smaller MarketEven if third-degree pricediscrimination is feasible,it does
22、ntalways pay to sell to both groupsof consumers if marginal cost is rising.Chapter 11Slide 32No Sales to Smaller MarketQuantityD2MR2$/QMCD1MR1Q*P*Group one,with demand D1,are not willing to pay enoughfor the good tomake pricediscrimination profitable.Chapter 11Slide 33The Economics of Coupons and Re
23、batesnThose consumers who are more price elastic will tend to use the coupon/rebate more often when they purchase the product than those consumers with a less elastic demand.nCoupons and rebate programs allow firms to price discriminate.Price DiscriminationChapter 11Slide 34Price Elasticities of Dem
24、and for Users Versus Nonusers of CouponsToilet tissue-0.60-0.66Stuffing/dressing-0.71-0.96Shampoo-0.84-1.04Cooking/salad oil-1.22-1.32Dry mix dinner-0.88-1.09Cake mix-0.21-0.43Price ElasticityProductNonusersUsersChapter 11Slide 35Cat food-0.49-1.13Frozen entre-0.60-0.95Gelatin-0.97-1.25Spaghetti sau
25、ce-1.65-1.81Crme rinse/conditioner-0.82-1.12Soup-1.05-1.22Hot dogs-0.59-0.77Price ElasticityProductNonusersUsersPrice Elasticities of Demand for Users Versus Nonusers of CouponsChapter 11Slide 36The Economics of Coupons and RebatesnCake MixlNonusers of coupons:PE=-0.21lUsers:PE=-0.43Chapter 11Slide
26、37The Economics of Coupons and RebatesnCake Mix Brand(Pillsbury)lPE:8 to 10 times cake mix PEnExamplelPE Users:-4lPE Nonusers:-2Chapter 11Slide 38The Economics of Coupons and RebatesnUsing:nPrice of nonusers should be 1.5 times userslOr,if cake mix sells for$1.50,coupons should be 50 cents)11()11(12
27、21EEPPChapter 11Slide 39Airline FaresnDifferences in elasticities imply that some customers will pay a higher fare than others.nBusiness travelers have few choices and their demand is less elastic.nCasual travelers have choices and are more price sensitive.Chapter 11Slide 40Elasticities of Demand fo
28、r Air Travel Price-0.3-0.4-0.9 Income1.21.21.8Fare CategoryElasticityFirst-ClassUnrestricted CoachDiscountChapter 11Slide 41Airline FaresnThe airlines separate the market by setting various restrictions on the tickets.lLess expensive:notice,stay over the weekend,no refundlMost expensive:no restricti
29、onsChapter 11Slide 42Intertemporal PriceDiscrimination and Peak-Load PricingnSeparating the Market With TimelInitial release of a product,the demand is inelasticuBookuMovieuComputerChapter 11Slide 43nSeparating the Market With TimelOnce this market has yielded a maximum profit,firms lower the price
30、to appeal to a general market with a more elastic demand uPaper back booksuDollar MoviesuDiscount computersIntertemporal PriceDiscrimination and Peak-Load PricingChapter 11Slide 44Intertemporal Price DiscriminationQuantityAC=MC$/QOver time,demand becomesmore elastic and price is reduced to appeal to
31、 the mass market.Q2MR2D2=AR2P2D1=AR1MR1P1Q1Consumers are dividedinto groups over time.Initially,demand is lesselastic resulting in a price of P1.Chapter 11Slide 45nDemand for some products may peak at particular times.lRush hour trafficlElectricity-late summer afternoonslSki resorts on weekendsInter
32、temporal PriceDiscrimination and Peak-Load PricingPeak-Load PricingChapter 11Slide 46nCapacity restraints will also increase MC.nIncreased MR and MC would indicate a higher price.Peak-Load PricingIntertemporal PriceDiscrimination and Peak-Load PricingChapter 11Slide 47nMR is not equal for each marke
33、t because one market does not impact the other market.Peak-Load PricingIntertemporal PriceDiscrimination and Peak-Load PricingChapter 11Slide 48MR1D1=AR1MCP1Q1Peak-load price=P1.Peak-Load PricingQuantity$/QMR2D2=AR2Off-load price=P2.Q2P2Chapter 11Slide 49How to Price a Best Selling NovelnWhat Do You
34、 Think?1)How would you arrive at the price for the initial release of the hardbound edition of a book?Chapter 11Slide 50How to Price a Best Selling NovelnWhat Do You Think?2)How long do you wait to release the paperback edition?Could the popularity of the book impact your decision?Chapter 11Slide 51
35、nWhat Do You Think?3)How do you determine the price for the paperback edition?How to Price a Best Selling NovelChapter 11Slide 52The Two-Part TariffnThe purchase of some products and services can be separated into two decisions,and therefore,two prices.Chapter 11Slide 53The Two-Part TariffnExamples1
36、)Amusement ParkuPay to enteruPay for rides and food within the park2)Tennis ClubuPay to joinuPay to playChapter 11Slide 54The Two-Part TariffnExamples3)Rental of Mainframe ComputersuFlat FeeuProcessing Time4)Safety RazoruPay for razoruPay for bladesChapter 11Slide 55The Two-Part TariffnExamples5)Pol
37、aroid FilmuPay for the camerauPay for the filmChapter 11Slide 56The Two-Part TariffnPricing decision is setting the entry fee(T)and the usage fee(P).nChoosing the trade-off between free-entry and high use prices or high-entry and zero use prices.Chapter 11Slide 57Usage price P*is set whereMC=D.Entry
38、 price T*is equal to the entire consumer surplus.T*Two-Part Tariff with a Single ConsumerQuantity$/QMCP*DChapter 11Slide 58D2=consumer 2D1=consumer 1Q1Q2The price,P*,will be greater than MC.Set T*at the surplus value of D2.T*Two-Part Tariff with Two ConsumersQuantity$/QMCABCABC e than twicmore )()(2
39、21*QQxMCPTChapter 11Slide 59The Two-Part TariffnThe Two-Part Tariff With Many Different ConsumerslNo exact way to determine P*and T*.lMust 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
40、 60The Two-Part TariffnThe Two-Part Tariff With Many Different ConsumerslTo find optimum combination,choose several combinations of P,T.lChoose the combination that maximizes profit.Chapter 11Slide 61Two-Part Tariff withMany Different ConsumersTProfita:entry fees:salesTotalT*Total profit is the sum
41、of the profit from the entry fee andthe profit from sales.Both depend on T.entrantsnnQMCPTTnsa)()()(Chapter 11Slide 62The Two-Part TariffnRule of ThumblSimilar demand:Choose P close to MC and high TlDissimilar demand:Choose high P and low T.Chapter 11Slide 63The Two-Part TariffnTwo-Part Tariff With
42、A TwistlEntry price(T)entitles the buyer to a certain number of free unitsuGillette razors with several bladesuAmusement parks with some tokensuOn-line with free timeChapter 11Slide 64Polaroid Camerasn1971 Polaroid introduced the SX-70 cameranWhat Do You Think?lHow would you price the camera and fil
43、m?Chapter 11Slide 65Polaroid CamerasnHintcameras producing of costfilm producing of costsold cameras of numbersold film ofquantity camera of pricefilm of price)()()()(2121nCQCnQTPnCQCnTPQChapter 11Slide 66Pricing Cellular Phone ServicenQuestionlWhy do cellular phone providers offer several different
44、 plans instead of a single two-part tariff with an access fee and per-unit charge?Chapter 11Slide 67BundlingnBundling is packaging two or more products to gain a pricing advantage.nConditions necessary for bundlinglHeterogeneous customerslPrice discrimination is not possiblelDemands must be negative
45、ly correlatedChapter 11Slide 68BundlingnAn example:Leasing“Gone with the Wind”&“Getting Gerties Garter.”lThe reservation prices for each theater and movie are:Gone with the Wind Getting Gerties GarterTheater A$12,000$3,000Theater B$10,000$4,000Chapter 11Slide 69BundlingnRenting the movies separately
46、 would result in each theater paying the lowest reservation price for each movie:lMaximum price Wind=$10,000lMaximum price Gertie=$3,000nTotal Revenue=$26,000Chapter 11Slide 70BundlingnIf the movies are bundled:lTheater A will pay$15,000 for bothlTheater B will pay$14,000 for bothnIf each were charg
47、ed the lower of the two prices,total revenue will be$28,000.Chapter 11Slide 71BundlingnNegative Correlated:Profitable to BundlelA pays more for Wind($12,000)than B($10,000).lB pays more for Gertie($4,000)than A($3,000).Relative ValuationsChapter 11Slide 72BundlingnIf the demands were positively corr
48、elated(Theater A would pay more for both films as shown)bundling would not result in an increase in revenue.Gone with the Wind Getting Gerties GarterTheater A$12,000$4,000Theater B$10,000$3,000Relative ValuationsChapter 11Slide 73BundlingnIf the movies are bundled:lTheater A will pay$16,000 for both
49、lTheater B will pay$13,000 for bothnIf each were charged the lower of the two prices,total revenue will be$26,000,the same as by selling the films separately.Chapter 11Slide 74BundlingnBundling Scenario:Two different goods and many consumerslMany consumers with different reservation price combinatio
50、ns for two goodsChapter 11Slide 75Reservation Pricesr2(reservationprice Good 2)r1(reservation priceGood 1)$5$10$5$10$6$3.25$8.25$3.25ConsumerAConsumerCConsumerBConsumer A is willing to pay up to$3.25 for good 1 andup to$6 for good 2.Chapter 11Slide 76Consumption Decisions WhenProducts are Sold Separ
