nlecture18 - monopoly pricing 2 - slides

nlecture18 - monopoly pricing 2 - slides - 4/14/2009 Topic...

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4/14/2009 1 Topic 7: Monopoly (3) USC Marshal Pricing strategies (2) PD based on observables • Perfect price discrimination is impossible • A partial solution is price discrimination based on observables – The firm can tell certain customer groups apart and prevent resale between them USC Marshal • Children, students, seniors – But cannot engage in quantity-dependent pricing within the group, for example, because • Cannot prevent resale • Consumers only want one unit PD based on observables • Then, the optimal pricing strategy simplifies to choosing the optimal linear price per group – For each group, choose the price so that P i MC P i 1 E i d USC Marshal Results: • Compared to uniform pricing, the price for the less elastic segment goes up and the price for the more elastic segment goes down –Student and senior discounts • The impact of allowing price discrimination based on observables on welfare is ambiguous
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4/14/2009 2 PD based on observables Example: – A town has 100 students and 100 adults. You are operating a movie theater. Per-student demand for movie tickets is Q student =7-P while the Per-adult demand for movie tickets is Q adult =11-P. Your marginal cost of a seat is 1 USC Marshal marginal cost of a seat is 1. • What is the optimal uniform price? • What is the optimal per-category price? PD based on observables P P P 7 11 Demand joint MR USC Marshal Q Q Q students adults total 700 1100 MC P=5 P=6 P=4 PD based on observables Observations: – Profits of the firm go up – The less elastic category (adults) is hurt by an increase in prices – The more elastic category (students) benefit USC Marshal through a decrease in prices – In this example, aggregate welfare went down – Need the ability to prevent arbitrage
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4/14/2009 3 PD based on observables Welfare: – In general, price discrimination based on observables can either increase or decrease aggregate surplus Decreasing: USC Marshal • Generates a distorted allocation. The marginal student is just willing to pay P=4, while the marginal adult is willing to pay 6. Increasing: • Monopolist can expand aggregate output after being able to price discriminate • Potentially only one customer category would be otherwise served PD based on observables • For example, if we let the student demand be –Q=7-3P – Then, if forced to charge a uniform price, the monopolist would choose to serve only adults and charge a price P = 6 USC Marshal – Now, allowing price discrimination has no impact on the adults while generating additional profits and CS for students PD based on self-selection • Finally, while the ability of a firm to group its customers based on observable characteristics and to discriminate among them is profitable, there is also a lot of unobservable heterogeneity within groups USC Marshal • To benefit from this heterogeneity, firms engage on price discrimination based on self-selection, also known as screening – Firms offer a menu of alternatives and allows consumers to choose among them
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This note was uploaded on 04/21/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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nlecture18 - monopoly pricing 2 - slides - 4/14/2009 Topic...

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