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Chapter 11 Pricing with market power

# Chapter 11 Pricing with market power - Capturing Consumer...

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1 Chapter 11 Market Structure and Competitive Strategy Capturing Consumer Surplus Charge different prices to different customers. To capture consumer surplus and transfer it to the producer surplus. Price Discrimination First-Degree Price Discrimination – Charging each customer his or her reservation price is called perfect first-degree price discrimination . Second-Degree Price Discrimination – Charging different prices for different quantities of the same good or service. – Ex Quantity discounts

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2 Third-Degree Price Discrimination – Charging different prices to two or more groups with nearby same product. – Let’s look at algebraically π = P 1 Q 1 + P 2 Q 2 – C(Q T ) Determining Relative Prices – Manager may find it easier to think in terms of the relative prices – Recall; MR = P(1+1/E d ) P 1 = (1+1/E 2 ) P 2 (1+1/E 1 ) Ex : If the elasticity of demand for consumers in group 1 is -2 and for the group 2 is -4. Find relative price. What does it mean? Comprehensive Problem Ex : Suppose that BMW can produce any quantity of cars at a constant marginal cost of \$20,000 and a fixed cost of \$10
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Chapter 11 Pricing with market power - Capturing Consumer...

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