L4-pricing-all-1

# L4-pricing-all-1 - 3 Pricing and Advertising Reading Perloff Ch 12 Topics Why and how firms price discriminate Perfect price discrimination

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3. Pricing and Advertising Reading: Perloff, Ch. 12 Topics: – Why and how firms price discriminate – Perfect price discrimination – Quantity discrimination – Multimarket Price Discrimination – Two-Part Tariffs – Tie-In sales – Advertising 100C 1

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Why and how firms price discriminate Some consumers are willing to pay more than others. Charging ach consumer exactly his willingness- - ay is optimal for the firm each consumer exactly his willingness to pay is optimal for the firm (as long as p>=MC). nly firms with market power can price discriminate Only firms with market power can price discriminate. Identifying consumers with higher willingness-to-pay is the big difficulty. Firms must also be able to prevent resales. Not all price differences are price discrimination – Example: Airline tickets booked in advance vs. same day. 100C 2
Perfect Price Discrimination Also called first-degree price discrimination Under perfect price discrimination, the firm charges each consumer exactly his willingness-to-pay. Requires exact information on each person’s individual demand curve. This is our benchmark: The best case the firm could achieve in ideal circumstances. 100C 3

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Figure 12.1 erfect Price Discrimination Perfect Price Discrimination 100C 4
Figure 12.2: Competitive, Single-Price, and Perfect iscrimination Equilibria Discrimination Equilibria 100C 5

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Calculus Analysis 100C 6
Example We are given the following demand and cost functions: D(q) = 100 – 5q C(q) = 20q 20 ) 5 100 ( ) ( 0 q dz z q q 6 0 20 5 100 q dq d 16 q 100C 7

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Quantity Discrimination Also called second-degree price discrimination Quantity discrimination is the practice of charging different per-unit prices depending on the total quantity the consumer buys. – E.g. quantity discounts, block pricing Most commonly used when consumers have different individual demands. Consumers who buy small quantities pay more per unit than consumers who buy large quantities. 100C 8
Figure 12.3 uantity Discrimination Quantity Discrimination 100C 9

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Example Demand: q(p) = 90 – p Costs: C(q) = 30q ) )( ( ) ( 2 1 2 2 1 1 cq q q q p q q p 0 2 30 ) )( 90 ( ) 90 ( 1 2 2 1 2 2 1 1 q q d q q q q q q 0 60 2 2 1 1 q q q d dq 0 er its l r 50 arges rm he e 0 0 20. to up units all for \$70 charges firm the i.e. 70 20 * * * 1 * 1 2 p q dq 100C 10 20. over units all for \$50 charges firm the i.e. 50 40 2 2 p q
Multimarket Price Discrimination

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## This note was uploaded on 10/21/2010 for the course ECON 1530 taught by Professor Ohly during the Spring '10 term at Dartmouth.

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L4-pricing-all-1 - 3 Pricing and Advertising Reading Perloff Ch 12 Topics Why and how firms price discriminate Perfect price discrimination

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