Lecture 5

Lecture 5 - Advanced Pricing II Recall Three types of price...

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1 Advanced Pricing II • Recall: Three types of price discrimination • For all, need market power and ability to prevent arbitrage/resale • Today……more second-degree price discrimination – Two-part tariffs – Bundling • Dynamic aspects of pricing Two-part tariffs • Can be useful when consumers are choosing both whether to buy and how much to buy. • Entry fee (tariff) - T * , and per-unit price - P * • Examples – Phone service – Bars with cover charge – Online services – Polaroid cameras and film/Razors and blades – Bulk discount stores (Costco, BJ’s) –O t h e r s ? Simple Case: One Customer Type • All consumers have the exact same downward sloping demand curve • If only set a single price Q D MC MR P
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2 One Customer Type - II • Two-Part Tariff – Can use tariff T to “extract” consumer surplus at any per-unit price P. • Optimal to set P * =MC, T * =(consumer surplus at P * =MC). No per-unit profits, but you capture all the surplus!!! Q D MC = P* P T* Now Two Types of Customers • Example: Online service -T = t a r i f f – P = price you charge customers per hour of use – Q = hours of online time purchased – 2 types of customers, 1000 of each “Hardcore”, with demand Q H = 60 – 60P “Casual”, with demand Q C = 30 – 30P – Fixed cost of bandwidth and content is $15000/month – Marginal cost of extra use = 0 • Possible pricing strategies – 1) Set a single price – 2) Use 2-part tariff (go for only “hardcore” group, or both?) Charge Single Price • Individual demands: Q H = 60 – 60P and Q C = 30 – 30P Add d d t bt i k t d d • Add demands to obtain market demand Q = 1000(60 – 60P) + 1000(30 – 30P) = 90000 – 90000P or, converting to an “inverse” demand function, P = 1 – Q/90000
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3 Charge Single Price (cont’d.) • Market Demand P = 1 – Q/90000 • Max profit: Π = PQ - FC = Q – Q 2 /90000 – FC d Π/ dQ = 1 – 2Q/90000 = 0 Q = 45000, P = .50
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This note was uploaded on 09/03/2009 for the course ECON 106E taught by Professor Ackerberg during the Spring '08 term at UCLA.

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Lecture 5 - Advanced Pricing II Recall Three types of price...

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