Week 6B

# Week 6B - Comm/FRE 295 Pricing Strategies With Market Power...

This preview shows pages 1–10. Sign up to view the full content.

1 Comm/FRE 295 October 14, 2010 Pricing Strategies With Market Power

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Learning Outcomes • Pricing Rule for TDPD (how optimal price ratio depends on demand elasticities) • Intertemporal Price Discrimination (TDPD over time) • Confusion between price discrimination and passing on cost savings • Two-Part Tariffs (how can fixed/admission fees raise profits?) • Bundling (how can selling goods bundled together raise profits?) 2
Rule of Thumb for 3 rd Degree Price Discrimination • A firm with a single group of customers uses the following rule to maximize profits: (P - MC)/P = -1/E • A firm with 2 groups of customers chooses Q1 & Q2 (sales to group 1 and 2) to maximize profits: π = Rev1(Q1) + Rev2(Q2) –C(Q1 + Q2) • Use calculus to maximize: d π/dQ1 = d(Rev1)/dQ1 – dC/dQ1 = 0 MR1 = MC d π/dQ1 = d(Rev2)/dQ2 – dC/dQ2 = 0 MR2 = MC 3

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Rule for TDPD; Cont’n • Profits are maximized when MR1 = MR2 = MC • Recall from last lecture that MR = P(1 + 1/E) Combine to obtain P 1 (1 + 1/E 1 ) = P 2 (1 + 1/E 2 ) Notice that if group 1 has the most elastic demand, then E 1 < E 2 which implies P 1 < P 2 , as expected 4 1 2 2 1 1 1 + P E = P 1 1 + E   
5 Intertemporal Price Discrimination (IPD) • TDPD over time (e.g., new electronics, movies, books); eager (patient) consumers have an inelastic (elastic) demand • TDPD charge a high price initially (exclude those with elastic demand) and eventually lower price (target the elastic demand consumers after serving inelastic demand consumers) • Usually no problem with consumer arbitrage • Solution procedure is same as TDPD, as discussed above

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Pricing of Ski Passes • Suppose the elasticity of demand for skiing is equal to -2 in March and -4 in April. The MC of serving skiers is the same for both months • How large of a price discount (expressed as a percent of the March price) should be offered to April skiers? 6
7 Two-Part Tariff (TPT) • Common for firms to charge an up-front fee along with a price per unit consumed - Vancouver PNE charges \$8 to enter and then \$4 per ride - Internet provider charges \$20 per month and \$2 per 100 MB over base - Canadian Springs charges \$130 per year for cooler and \$7 per bottle - Gillette charges \$12 for razor assembly and \$10 per pack of ten blades - Golf courses charge \$500 yearly membership fee and \$40 per round • Optimal prices depend on the degree of heterogeneity of consumer demand

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Comparison to Volume Discounts • A TPT is similar to a volume discount • The higher the quantity consumed (Q), the lower the average fixed fee per unit of Q • Firms sometimes give consumers the choice between a straight cash price and a TPT; e.g., Whistler Edge Card • Allows firm to price discriminate by offering a lower price to high volume consumers
9 Features of TPT • With no consumer heterogeneity, the outcome is the same as the first degree price discrimination (FDPD) outcome

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 29

Week 6B - Comm/FRE 295 Pricing Strategies With Market Power...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online