Ec100A Ch11 - 11 PRICING STRATEGIES CAPTURING CONSUMER...

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PRICING STRATEGIES 11
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Econ 100A Mortimer CAPTURING CONSUMER SURPLUS It is profitable for a firm to sell to customers who are willing to pay more than the marginal cost of producing those units. If the firm can charge more than P* to customers in region A of the demand curve and charge less than P* but more than MC to those in region B of the demand curve, it can capture consumer surplus and increase its profit. Charging more than one price is profitable. price discrimination Practice of charging different prices to different consumers for similar goods. Market conditions needed for price discrimination: 1. A firm must have market power 2. The firm must have some information about the different amounts people will pay for its product 3. The firm must be able to prevent resale, or arbitrage
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Econ 100A Mortimer PRICE DISCRIMINATION First-Degree Price Discrimination reservation price Maximum price that a customer is willing to pay for a good. first-degree price discrimination (perfect price discrimination) Practice of charging each customer her reservation price. variable profit Sum of profits on each incremental unit produced by a firm; i.e., profit ignoring fixed costs . P P m P c Q c Q m CS when a single price P m is charged Additional profit from perfect price discrimination Variable profit when a single price P m is charged MR D (MR under perfect price discrimination) MC
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Econ 100A Mortimer PRICE DISCRIMINATION First-Degree Price Discrimination Firms usually don’t know the reservation price of every consumer, but imperfect price discrimination is still beneficial. Here, six different prices are charged. The firm earns higher profits, but some consumers may also benefit (see the purple triangles). With a single price P* 4 , there are fewer consumers. The consumers who now pay P 5 or P 6 enjoy a surplus. Imperfect Price Discrimination Price discrimination allows more units to be sold than a single price
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Econ 100A Mortimer PRICE DISCRIMINATION Second-Degree Price Discrimination second-degree price discrimination Practice of charging different prices per unit for different quantities of the same good or service (i.e., quantity discounts ). Here, we are looking at one consumer and there are three blocks, with corresponding prices P 1 , P 2 , and P 3 . Second-degree price discrimination can then make consumers better off by expanding output and lowering cost while allowing for greater profit to the firm. π when a single P 0 is charged π when P 1 , P 2 , and P 3 are charged block pricing Practice of charging different prices for different quantities or “blocks” of a good. CS when a single P 0 is charged CS when P 1 , P 2 , and P 3 are charged
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Econ 100A Mortimer PRICE DISCRIMINATION Exercise: Finding the optimal block pricing Q: Assume an individual consumer’s demand is P=20- Q and marginal cost is constant at $2. What is the optimal block pricing if the firm will have two block tariffs?
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This note was uploaded on 04/24/2009 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.

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Ec100A Ch11 - 11 PRICING STRATEGIES CAPTURING CONSUMER...

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