Lecture-2-Price-Discrimination-Brian (1)

Lecture-2-Price-Discrimination-Brian (1) - Lecture 2...

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Econ 404 Jacob LaRiviere & Brian Quistorf Lecture 2 Multiple Prices, Econometrics & Modeling Demand Curves
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Broad Agenda Introductions Homework 1 Section 1: Competition & Direct Price Discrimination [Break] Section 2: Indirect price discrimination [Empirical Setup & Break] Section 3: Intro to Demand Modelling 2
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Homework 1 Collect Homework Discuss: Deviations from “Law of one price” Confusing aspects of markets 3
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Section 1: Agenda Bargaining with perfect information Bargaining with uncertainty Single price vs. Segmentation Value-based pricing for segmentation Direct price discrimination Discussion: Ethics of segmentation 4
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Bargaining with complete information My value for a good: Your cost of service for that good: We both know all this P=10 P=0 P=20 Bargaining region Seller walks away Buyer walks away 5
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Bargaining and outside options My value for a good: Your cost of service for that good: Competitor price for the same good is 15 P=10 P=0 P=20 Bargaining region Seller walks away Buyer walks away Competitor gets sale 6
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Bargaining and outside options My value for a good: Your cost of service for that good: Competitor has a good that I like less: P=10 P=0 P=20 Bargaining region Seller walks away Buyer walks away Prefer to buy the cheaper, less preferred good from the competitor 7
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What price will be set? Economic theory says if both sides know each other’s values and costs, some deal will be made. It does not say what price will be set. Bargaining power: factors that determine how much of the surplus each side gets from a transaction. P=10 P=0 P=20 Bargaining region Seller walks away Buyer walks away 8
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Threat points in bargaining “threat points”: the outcomes if one party walks away If my threat point is bad, bargaining breakdown is very bad for me. What is my outside option if we don’t make a deal? Ex. A factory negotiating with employees over wages. Each employee’s threat point is to quit, which may lead to financial troubles for them. For the factory, having one less employee is probably not that big a deal. Bargaining “alone”, the factory has most of the bargaining power. Unions allow workers to bargain together. Now the threat point is to strike, meaning the factory is shut down, at least in the short-run. 9
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Bargaining with uncertainty My value for a good: (equal chance of any value 10 to 20) You own the good and value it at: 5 My value is probably above yours, but maybe not 15 10 20 Myerson Satterthwaite Theorem: there is no mechanism that guarantees a transaction will be made when > Idea: the seller doesn’t know the buyers valuation, wants to increase price and may in advertently price buyer out of market.
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