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slides_class8 - Managerial Economics Class 8 1. First...

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Managerial Economics – Class 8 1. First Degree Price Discrimination 2. Second Degree Price Discrimination 3. Third Degree Price Discrimination 1
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Price Discrimination Price discrimination encompasses a range of pricing strategies that are designed to extract more consumer surplus than is possible under the ‘fixed price per unit’ scheme that we have examined thus far. The basics: First Degree Price Discrimination : All consumer surplus can be extracted via a ‘take-it-or-leave-it’ offer. Second Degree Price Discrimination : “Nonlinear” pricing schemes like volume discounts. Third Degree Price Discrimination : Pricing based on observable demographic attributes that are correlated with price elasticity of demand 2
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“Standard” Monopoly Diagram Price Quantity P = 10 - 2Q 10 8 6 4 2 1 2 3 4 5 MC MR = 10 - 4Q Producer surplus from standard pricing = $8 3
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First-Degree Price Discrimination Charge each consumer the maximum amount he or she is willing to pay for each incremental unit of the good. Permits monopolist to extract all surplus from consumers. Price Quantity 10 8 6 4 2 1 2 3 4 5 .5(4-0)(10 - 2) Total Cost* = $8 MC * Assuming no fixed costs 4
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Characteristics of FDPD The monopolist gains: revenue and profits go up. The “low-price buyers” gain, since under standard monopoly pricing they would have been priced out of the market. The “high-price buyers” lose, since they end up paying more than they would have under stand monopoly pricing The quantity sold is higher than under standard monopoly pricing. In fact, it is the same as the quantity that would be sold under perfect competition (note that price equals marginal cost for last unit sold)
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Barriers to Implementation In practice, information constraints make it difficult to implement first-degree price discrimination (but in a few markets, e.g., new cars, some professionals can come close). Moreover, first degree price discrimination won’t work if consumers can resell the good. Why? 6
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Second-Degree Price Discrimination Present all customers with a menu of prices and allow the customers to self-select. Example: Quantity discounts Suppose we charge $8 per unit for first two units purchased and $5 per unit for all additional units Eliminates the information constraint present in first- degree price discrimination. Price MC D $5 $10 4 Quantity $8 2 7
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An SDPD example Suppose you like theatre. The following will be performed this season at the Greenville Little Theatre: American Idiot, Tiny Kushner, Aurelia’s Oratorio, Coming Home, The Distant West, The German, Moxie If you want premium seats for Saturday night, you could buy: Season tickets : $65 per ticket for all 7 plays ($65*7 = $455) A la carte tickets: $71 per ticket plus $86 for American Idiot ($71x6 + $86 = $512) Is this just quantity discounting or something else?
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Three possible pricing schemes Assume MC =0. Let’s consider some pricing strategies.
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slides_class8 - Managerial Economics Class 8 1. First...

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