11 Pricing Strategies

# 11 Pricing - 11 PRICING STRATEGIES Econ 100A Mortimer 1 CAPTURING CONSUMER SURPLUS We learn many different ways for a firm with market power to

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PRICING STRATEGIES 11 11/2/2009 1 Econ 100A Mortimer

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Econ 100A Mortimer CAPTURING CONSUMER SURPLUS We learn many different ways for a firm with market power to extract consumer surplus by more than one price. 1. 1 st degree, 2 nd degree, and 3 rd degree price discrimination 2. Intertemporal price discrimination 3. Two-part tariff 4. Bundling and tying 11/2/2009 2
Econ 100A Mortimer PRICE DISCRIMINATION Practice of charging different prices to different consumers for similar goods. Price discrimination is possible if the firm: 1. has market power 2. has some information about the different amounts people will pay for its product 3. is able to prevent resale, or arbitrage P Q 11/2/2009 3

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Econ 100A Mortimer PRICE DISCRIMINATION First-Degree Price Discrimination reservation price Maximum price that a customer is willing to pay for a good. Practice of charging each customer her reservation price (a.k.a. perfect price discrimination) P Q 11/2/2009 4
Econ 100A Mortimer PRICE DISCRIMINATION Second-Degree Price Discrimination Practice of offering quantity discounts (e.g., block pricing) 11/2/2009 5 P Q MC AC D MR

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Econ 100A Mortimer PRICE DISCRIMINATION Exercise: Finding the optimal block pricing Q: Assume an individual consumer’s demand is P=20-Q and marginal cost is constant at \$2. What is the optimal block pricing if the firm will have two block tariffs? MC \$20 P 1 P 2 \$2 Q 1 Q 2 18 11/2/2009 6 A:
Econ 100A Mortimer PRICE DISCRIMINATION Third-Degree Price Discrimination Practice of dividing consumers into two or more groups with separate demand curves and charging different prices to each group (e.g., student and senior citizen discounts) 11/2/2009 7 The total output should be divided between the two groups so that MR 1 = MR 2 The total MR curve (MR T ) = the horizontal sum of MR 1 and MR 2 MR T = MR 1 = MR 2 Q D 1 : P=40-Q 1 D 2 : P=50-2Q 2 MR 2 =50-4Q 2 MR 1 =40-2Q 1 P 10 20

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Econ 100A Mortimer PRICE DISCRIMINATION Third-Degree Price Discrimination 11/2/2009 8 MR T = (130/3)-(4/3)Q T MC = 1/3 Q T P 2 P 1 Q T Q The monopolist maximizes its profit by setting MC = MR T (=MR 1 =MR 2 ) D 1 : P=40-Q 1 D 2 : P=50-2Q 2 MR 2 =50-4Q 2 MR 1 =40-2Q 1 D T : P=(130/3) (2/3)Q T P Q 1 Q 2
Econ 100A Mortimer PRICE DISCRIMINATION

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## This note was uploaded on 02/12/2010 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.

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11 Pricing - 11 PRICING STRATEGIES Econ 100A Mortimer 1 CAPTURING CONSUMER SURPLUS We learn many different ways for a firm with market power to

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