rlecture18 - monopoly pricing 2

# rlecture18 - monopoly pricing 2 - Topic 7 Monopoly(3...

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opic 7: Monopoly (3) Topic 7: Monopoly (3) Pricing strategies (2) USC Marshall

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PD based on observables • Perfect price discrimination is impossible partial solution is rice discrimination based A partial solution is price discrimination based on observables – The firm can tell certain customer groups apart and prevent resale between them • Children, students, seniors – But cannot engage in quantity-dependent pricing within the group, for example, because • Cannot prevent resale • Consumers only want one unit USC Marshall
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 1 Results: P i E i d • Compared to uniform pricing, the price for the less elastic segment goes up and the price for e more elastic segment goes down the more elastic segment goes down –Student and senior discounts he impact of allowing price discrimination USC Marshall • The impact of allowing price discrimination based on observables on welfare is ambiguous

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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 dult demand for movie tickets is Q adult =11-P. Your marginal cost of a seat is 1. hat is the optimal uniform price? • What is the optimal uniform price? • What is the optimal per-category price? USC Marshall
PD based on observables P P P emand 7 11 Demand joint MR MC Q Q Q students adults total 700 1100 USC Marshall

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PD based on observables P P P emand 7 11 Demand joint MR 5 MC P=5 Q Q Q students adults total 700 1100 USC Marshall
PD based on observables P P P emand 7 11 Demand joint MR 5 P=6 MC P=5 P=4 Q Q Q students adults total 700 1100 USC Marshall

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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 through a decrease in prices – In this example, aggregate welfare went down – Need the ability to prevent arbitrage USC Marshall
PD based on observables Welfare: – In general, price discrimination based on observables can either increase or decrease aggregate surplus Decreasing: • Generates a distorted allocation. The marginal tudent is just willing to pay P=4 while 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 USC Marshall • Potentially only one customer category would be otherwise served

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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 – Now, allowing price discrimination has no impact n the adults while generating additional profits on the adults while generating additional profits and CS for students USC Marshall
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## This note was uploaded on 09/10/2009 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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rlecture18 - monopoly pricing 2 - Topic 7 Monopoly(3...

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