Price setteing

Price setteing - Economics100C MicroeconomicsC...

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Economics 100C Microeconomics C Pricing Strategies 3. Pricing Strategies Fall 2009 erb Newhouse Herb Newhouse 1 eadings Readings erloff Perloff Ch 12: Pricing and Advertising. mit 2 6 & 12 7 ie Sales & Advertising Omit 12.6 & 12.7: Tie In Sales & Advertising. 2 utline Outline rice discrimination Price discrimination. Perfect price discrimination. uantity discrimination Quantity discrimination. Multi market discrimination. Two part tariffs. 3 day’s Assumption Today s Assumption We’ll work with a simplified cost structure during e o t a spe d cost st uctu e du g today’s lecture. Marginal cost is constant and no fixed costs. C ( q ) = cq where c > 0. MC ( q ) = AC ( q ) = c . S = PS π . This assumption is just to simplify our graphs and algebra. The general results will still hold for general cost functions. We’ll probably see other cost functions on the problem sets and exams. 4

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Comparing (Uniform Price) Monopoly and Perfect Competition p p Uniform Price Monopoly Perfect Competition C C D MC D MC q q 5 asic Idea for Pricing Strategies Basic Idea for Pricing Strategies Last time we derived the equilibrium for a uniform price monopoly. We found q m and p m such that: C = R < MC ( q m ) = MR ( q m ) < p m p m = value of inverse demand at q m his time we will study more complex pricing This time we will study more complex pricing strategies. The monopolist will be able to capture some or all of the consumer surplus and deadweight loss. Since the monopolist is capturing more surplus, he will produce closer to the efficient level of output. 6 The Issue of Price Discrimination Widespread practice: airfares, cell phone plans, student discounts, negotiating an auto purchase, quantity discounts (buy 1 get 1 free, pack sizes). Two units of a physically identical good offered at different prices (a) to the same consumer and/or (b) different consumers to different consumers. Requirement: No arbitrage. A consumer facing a low price must not be able to resell g p the product to consumers facing a high price. 7 Types of Price Discrimination First degree/Perfect price discrimination: Producer discriminates according to consumer type and quantity. cond egree: Second degree: Individual consumer’s type is unobservable. Producer designs (price, quantity, quality) menu so as to induce self lection selection. Quantity discounts (non linear pricing). Any individual may choose from available price schedules. y y p Third degree: Producer discriminates between consumers on basis of observed characteristics (location, age, profession, etc.). 8
rst egree Price Discrimination First degree Price Discrimination ey assumptions: Key assumptions: Monopolist knows every consumer’s demand curve (marginal valuation of each unit).

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This note was uploaded on 06/08/2010 for the course ECON 171 taught by Professor Newhouse during the Spring '07 term at UCSD.

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Price setteing - Economics100C MicroeconomicsC...

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