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Unformatted text preview: EC 146: Industrial Organization Solutions to Homework 3 Department of Economics Brown University November 9, 2007 1. One explanation for The Economists pricing policy is that they have figured out that their readers become somewhat loyal as they get to know the magazine. Loyal readers are less price- sensitive than first readers who are just shopping for magazines and are considering several alternatives besides The Economist. It thus makes sense to attract price-sensitive costumers (i.e., first readers) by offering them the product for a lower price, and then charge them a higher price for their subscription renewal once the have become loyal to the magazine. This strategy corresponds to a third-degree price discrimination because the firm offers different prices to consumers that have different characteristics. In this case, the characteristic of interest is whether they are already familiar with the magazine or not (which in turn presumes loyalty by those consumers who know about the magazine.) 2. [First a disclaimer: we borrowed this question (an the answer) from Robert Franks The Eco- nomic Naturalist] At first sight, it would seem that both Broadway theaters and airlines seek to fill as many seats as possible since an empty seat in either case represents a permanent loss of revenue. Nonetheless, theaters and airlines are reluctant to offer discount prices at any time because that would often mean losing the opportunity of filling seats with people that would have been willing to pay the regular rate. The airlines have figured out that business travelers are more likely than leisure travelers to schedule their flights closer to the date of their trip, and change their flight schedule at the last minute. Further, business travelers are known to be less sensitive to airfares than leisure travelers. This of course is not exclusive of business travelers. People may schedule a flight at the last minute because of some emergency, in which case they are also less price-sensitive. The airlines pricing policy has thus been to charge higher prices to those who reserve at the last minute (disproportionately business travelers or people with an emergency) and give discounts to those who reserve well in advance (mostly leisure travelers.) The situation above is reversed with theaters. Less price-sensitive theatergoers tend to have higher incomes and thus their time has a higher opportunity cost. These people would thus prefer to go to the most popular shows, which are usually sold out even at the regular rates....
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- Fall '07