Pricing455_2017Fall_lec3 - Price Discrimination (1).ppt

Pricing455_2017Fall_lec3 - Price Discrimination (1).ppt -...

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Price Discrimination Lecture 3 RSM 455, Pricing
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Announcement Assignment #1 is posted to Blackboard and deadline is October 3, 2pm. Please submit using Blackboard. Submit on Blackboard only in Word or PDF format If there is an issue with Blackboard submissions, please submit to TA via email Penalty applies for late submission Today is the deadline to form a group. If you don’t belong to a group yet, talk to your classmates during the break and after class. Each group needs to have at least 4 members. Email the TA & myself your group information (names and student IDs) by 9/27 midnight. 2
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Today Price Discrimination (also called Price Customization) Based on Ch.10 from Introduction to Industrial Organization by Luis Cabral Price elasticity and Profit-maximization Price Discrimination Nonlinear Pricing (aka 2 nd degree Price Discrimination) Bundling 3
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Price Elasticity of Demand Price Elasticity is the percentage change in quantity of the percent change in price i.e., Ed =|(ΔQ/Q) / (ΔP/P)| Tells you that for a given product being sold in a given market, are consumers being more or less price sensitive! Graphically, how do you expect this demand curve to look? 4
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Inelastic Demand Inelastic Demand (i.e., Ed < 1) higher price raises revenue. (e.g. Gasoline, Water, Electricity, Telephone service etc.) 5
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Price Elasticity of Demand Elastic Demand (i.e., Ed > 1) higher price lowers revenue. (e.g. Airline tickets, Stocks etc.) What impacts price elasticity of demand? Or what makes consumers more or less cost-conscious? Is meat elastic or non-elastic? 6
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Consumer surplus The difference between a consumer’s willingness-to-pay and the price paid for all the units that they consume. Basically, this is the net area under the demand curve (after subtracting the total price paid). Consumer surplus is also described as a measure of the welfare that people gain from consuming goods and services. 7
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Types of Price Discrimination First Degree Price Discrimination (1-to-1 Marketing) Charge every customer a different price based on their value or willingness-to-pay. Second Degree Price Discrimination Menu Pricing for Self-Selection Different prices for different product characteristics - versioning Different prices for different quantities (aka Non-Linear
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