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PAM_2000_Spring_2009_Lecture_22

PAM_2000_Spring_2009_Lecture_22 - PAM2000:Lecture22 n...

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PAM 2000: Lecture 22 n Agenda: Pricing with some market power q Second degree P.D. or quantity discounts q 3rd degree P.D. or multi-market P.D. q Two-part tariffs q Tie-in sales q Oligopoly and monopolistic competition q Dominant strategy
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Recall: Quantity Discrimination,  or second degree P.D. (con’t) n Recall: Firm does not know each consumer’s demand curve (or willingness to pay) n Only knows each demand curve slopes downward n Assumes each consumer has the same demand curve n Firm lets the price each customer pays vary with number of units n All customers pay the same price for a given Q n Consumer can purchase first Q1 units for P1, but can purchase next block for P2< P1
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Quantity Discrimination, or second  degree P.D. (con’t) n In figure: Firm charges a price of $70 on any Q between 1 and 20 n Charges consumer $50 on any units after the first 20
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Quantity Discrimination, or second  degree P.D. (con’t) n Firm is thus able to extract more CS than a single-price monopolist n The more block prices the monopolist can set, the closer it gets to perfect price discrimination n Efficiency effects? Relative to 1st degree? n Single price monopolist?
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Quantity Discrimination: Consumer’s demand curve
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 3rd Degree P.D. or Multi-market  Price Discrimination n Firm sells to two groups of consumers n R e-sales between the two groups are impossible n Firm acts like a single-price monopolist with respect to each group, based on the elasticity of demand for each group
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Multi-market Price Discrimination  (con’t) n Assume the firm has constant MC that is the same for each group n Example: Business versus tourist airline traveler n Airline maximizes profit where the MR in each market equals the MC
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Multi-market Price Discrimination  (con’t) n Let MRT = MR for tourist; and MRB = MR for business traveler n In equilibrium, will pick q so that: n MRT = MC = MRB n Recall that we showed, for single price monopolist: n MR = p[1 + 1/ε] = MC
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Multi-market Price Discrimination  (con’t) n So for two markets, we have: q MRT = pT [1 + 1/εT] = MC = MRB = pB[1 + 1/εB], or: q pT [1 + 1/εT] = pB[1 + 1/εB], or: q pT/pB = [1 + 1/εB]/[1 + 1/εT]
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Multimarket Pricing of Airfares: Tourist
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Multimarket Pricing of Airfares: Business travel
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 Multi-market Price Discrimination  (con’t) The ratio of prices for tourists versus business travelers depends only on the demand elasticities (noting that ε < 0) If εT > εB PT/PB < 1
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Multi-market Price Discrimination 
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