Lecture 17 18 2.21.06student

Lecture 17 18 2.21.06student - Lectures 17 and 18 Pricing...

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Lectures 17 and 18 Pricing
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Key issues 1. why and how firms price discriminate 2. perfect price discrimination 3. quantity discrimination 4. multimarket price discrimination 5. two-part tariffs 6. tie-in sales
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Applications and problems 1. Broadway theaters 2. Providian tries to perfectly price discriminate 3. Amazon dynamic pricing 4. 5. smuggling drugs from Canada 6. IBM requirement ties 7. eBay auctions
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Nonuniform pricing prices vary across customers or units noncompetitive firms use nonuniform pricing to increase profits
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Single-price firm nondiscriminating firm faces a trade-off between charging maximum price to consumers who really want good low enough price that less enthusiastic customers still buy as a result, single-price firm usually sets an intermediate price
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Price-discriminating firm avoids this trade-off earns a higher profit by charging higher price to those willing to pay more than the uniform price: captures their consumer surplus lower price to those not willing to pay as much as the uniform price: extra sales
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Extreme examples of tradeoff maximum customers will pay for a movie: college students, $10 senior citizens, $5 theater holds all potential customers, so MC = 0 no cost to showing the movie, so π = revenue
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Example Pricing Profit from 10 College Students Profit from 20 Seniors Total Profit Uniform, $5 $50 $100 $150 Uniform, $10 $100 $0 $100 Price discriminate $100 $100 $200
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Example Pricing Profit from 10 College Students Profit from 5 Seniors Total Profit Uniform, $5 $50 $25 $75 Uniform, $10 $100 $0 $100 Price discriminate $100 $25 $125
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Broadway theaters increase their profits 5% by price discriminating rather than by setting uniform prices
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Geographic price discrimination admission to Disneyland is $38 for out-of-state adults and $28 for southern Californians tuition at New York’s Fordham University is $4,000 less for commuting first-year students than for others 2001: Bellagio Hotel, Las Vegas, charged art lovers $12 each to see Steve Martin’s art collection—Nevada residents paid only $6.
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Successful price discrimination requires that firm have market power consumers have different demand elasticities, and firm can identify how consumers differ firm must be able to prevent or limit resales to higher-price-paying customers by others
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Preventing resales resales are difficult or impossible when transaction costs are high resales are impossible for most services
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Prevent resales by raising transaction costs price-discriminating firms raise transaction costs to make resales difficult applications: U.C. Berkeley requires anyone with a student ticket to show a student picture ID Nikon warranties cover only cameras sold in this country
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Prevent resales by vertically integrating VI: participate in more than one successive stage of the production and distribution chain for a good or service VI into the low-price purchasers
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This note was uploaded on 08/01/2008 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.

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Lecture 17 18 2.21.06student - Lectures 17 and 18 Pricing...

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