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Click to edit Master subtitle style  4/28/11 Lecture 8 Advanced Pricing Strategies (Continued) Econ 121: Industrial Organization UC Berkeley Fall 2010 Prof. Cristian Santesteban

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4/28/11 Overview Optimal Non-Linear Pricing Oligopoly Cournot Model
4/28/11 Optimal Two-Part Tariffs Consider a two-part tariff { p, A}. Suppose that a consumer makes a choice of q’ in response to this tariff. The monopolist could equivalently make a take-it-or-leave-it offer to the consumer of the quantity q’ for an outlay T , where T = A + pq’.

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4/28/11 Optimal Two-Part Tariffs We consider a choice among offers of this type when there are two consumer types. There is an option intended for each group: { T1, q1} for type 1 and {T2, q2} for type 2, where T2 > T1 and q2 > q1. Type 2’s have a higher willingness to pay than type 1’s and the
4/28/11 Consumer Preferences

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4/28/11 Optimal Two-Part Tariffs A two-part tariff { A, p} is the equivalent of a budget constraint for consumers. In (T , q) space it is simply a line: T = A + pq. Consumers choose any point on it. The one they choose is the one that maximizes their utility. This will be where there is a tangency between the two-part tariff line and the indifference curves of
4/28/11 Optimal Two-Part Tariffs At the optimal consumption level the slope of the indifference curves will equal the slope of the two-part tariff, p. The monopolist chooses the optimal two-part tariff to maximize profits, knowing how both types of consumer will respond. Recall that the optimal two-part tariff gives type 1 consumers a utility or

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4/28/11 Consumer Choice and Optimal Two-Part Tariff
4/28/11 Optimal Non-Linear Pricing We now demonstrate that the monopolist can increase her profits

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