ManEconCh08 - MANAGERIAL ECONOMICS: THEORY, APPLICATIONS,...

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MANAGERIAL ECONOMICS: THEORY, APPLICATIONS, AND CASES W. Bruce Allen | Keith Weigelt | Neil Doherty | Edwin Mansfield CHAPTER  8 Managerial Use of  Price Discrimination
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OBJECTIVES Objectives Explain how managers use price discrimination  to increase profits Identify submarkets with different price elasticities of  demand Segment the market and charge different prices to  consumers in each submarket
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MOTIVATION FOR PRICE  DISCRIMINATION Figure 8.1: Single-Price Monopolist Profit- Maximizing Outcome Single-price monopoly equilibrium fails to  capture all consumer surplus and also results in  a dead-weight loss. Price discrimination provides a strategic  mechanism for capturing some, or all, of this  lost surplus.
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PRICE DISCRIMINATION Price discrimination: When the same product is  sold at more than one price Differences in price among similar products are not   evidence of price discrimination unless these price  differences are not based on cost differences.
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PRICE DISCRIMINATION First-Degree Price Discrimination All customers are charged a price equal to their reservation price. The firm captures 100 percent of the consumer surplus. Equilibrium output and marginal cost are the same as under perfect  competition. There is no dead-weight loss. Requires that firms have a relatively small number of buyers and  that they are able to estimate buyers' reservations prices May be operationalized by means of a two-part tariff
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Second-Degree Price Discrimination Most commonly used by utilities (gas, electric,  water, etc.). Different prices are charged for different  quantities of a good. Figure 8.2: Second-Degree Price Discrimination
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ManEconCh08 - MANAGERIAL ECONOMICS: THEORY, APPLICATIONS,...

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