Perloff_397614_IM_Ch12 - Chapter 12 Pricing and Advertising...

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Chapter 12 Pricing and Advertising ± Chapter Outline 12.1 Why and How Firms Price Discriminate Why Price Discrimination Pays Who Can Price Discriminate Preventing Resales Not All Price Differences Are Price Discrimination Types of Price Discrimination 12.2 Perfect Price Discrimination How a Firm Perfectly Price Discriminates Perfect Price Discrimination: Efficient but Harmful to Consumers Transaction Costs and Perfect Price Discrimination 12.3 Quantity Discrimination 12.4 Multimarket Price Discrimination Multimarket Price Discrimination with Two Groups Identifying Groups Welfare Effects of Multimarket Price Discrimination 12.5 Two-Part Tariffs A Two-Part Tariff with Identical Consumers A Two-Part Tariff with Nonidentical Consumers 12.6 Tie-In Sales Requirement Tie-In Sales Bundling 12.7 Advertising The Decision Whether to Advertise How Much to Advertise
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Chapter 12 Pricing and Advertising 165 ± Teaching Tips Chapter 12 continues the presentation of monopoly models, but switches emphasis to price-setting behavior. The material on price discrimination is worth covering in detail for several reasons. First, students generally find the topic quite interesting, as they are aware of some types of price discrimination, but haven’t thought about them much (e.g., movie ticket prices), and are completely unaware of other types (such as dry cleaning prices). Also, price discrimination is an effective way to emphasize the importance of market power—for example, by comparing a monopolist charging a single price to the same firm practicing a perfect price discrimination. Finally, it is a good topic for generating class discussion. If you challenge the class to come up with illustrations of price discrimination, they sometimes will raise new and interesting examples. When discussing the conditions necessary to price discriminate, you might emphasize the ability to prevent resales. Finally, be sure that the class understands that price differences that result from cost differences are not price discrimination. Section 12.5 on two-part tariffs and Section 12.6 on tie-in and bundled sales are topics where the class should be able to take the lead in providing examples. Although they are often simply another tool for firms to extract consumer surplus, two-part tariffs and tie-ins do not seem to provoke the same reaction as price discrimination. This may be the case due to the pro-efficiency effects of many bundled products (such as tires and cars). On the other hand, the Internet browser offered by Microsoft as part of the Windows package evoked strong debate over what constitutes a separate but bundled commodity, and what should be considered an integral part of the original commodity. As an exercise, you might ask the class to draw up a set of guidelines that regulators should follow when deciding if a product bundle increases efficiency, or is a source of monopoly rents.
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This note was uploaded on 11/03/2009 for the course ARE 100A taught by Professor Constantine during the Spring '08 term at UC Davis.

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Perloff_397614_IM_Ch12 - Chapter 12 Pricing and Advertising...

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