Micro11 - _ Chapter 11 Dr. Safarzadeh Microeconomics...

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Microeconomics _____________ Chapter 11 Dr. Safarzadeh
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Chapter 11: Pricing with Market Power Basic Objective of Every Pricing Strategy:   Capturing consumer surplus and converting it into additional  profit for the firm. Ways To Achieve This Objective:    Price Discrimination Two-Part Tariff Bundling Advertising
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Chapter 11: Pricing with Market Power Consumer Surplus:   Difference between   reservation price   and the market price. Producer Surplus:   Difference between   the market price and  marginal cost. Reservation Price :   Maximum price that a consumer is  willing to pay for a good.
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Chapter 11: Pricing with Market Power
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Chapter 11: Pricing with Market Power
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Chapter 11: Pricing with Market Power Price Discrimination:   Practice of charging different prices  to different consumers for similar goods . Three Types of Price Discrimination : First-degree Price Discrimination Second-degree Price Discrimination Third-degree Price Discrimination First-Degree Price Discrimination: Practice of Charging each customer her reservation price.
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Chapter 11: Pricing with Market Power Pricing With Monopoly Power If a firm can charge only one price to all consumers , that will be P*. Ideally, firm would like to charge higher prices to consumers in region A to capture surplus there. The firm also would like to sell to consumers in region B at price lower than P*, as long as doing so doesn’t entail lowering price for other consumers.
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Chapter 11: Pricing with Market Power Outcome of  First-Degree Price Discrimination: Maximizes  profit by adding maximum  variable profit  (  = MR – MC),  the  brown area on the graph,   plus the extra profit in  the green area  of the graph  (see the graph in next slide). Variable Profit
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Micro11 - _ Chapter 11 Dr. Safarzadeh Microeconomics...

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