ajaz_204_2009_lecture_19

ajaz_204_2009_lecture_19 - University of Toronto Department...

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University of Toronto Department of Economics ECO 204 2009 2010 Sayed Ajaz Hussain Lecture 19 1 Ajaz Hussain. Department of Economics. University of Toronto (St. George)
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Today ± 3 rd degree price discrimination ² Price discriminate by segment ² Price discrimination without arbitrage ² Price discrimination with arbitrage ² Preventing arbitrage ± Intertemporal price discrimination ± Bundling ² Pure bundling ² Mixed bundling Ajaz Hussain. Department of Economics. University of Toronto (St. George) 2
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3 rd Degree Price Discrimination Ajaz Hussain. Department of Economics. University of Toronto (St. George) 3 Firm Output Inputs Segment A Segment B Segment C Basis of segmentation: Price Elasticity For 3 rd degree price discrimination: E A E B E C ECO 220 Interpretation: Statistically different
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3 rd Degree Price Discrimination: a Simple Model Ajaz Hussain. Department of Economics. University of Toronto (St. George) 4 Assumptions Ample capacity No possibility of arbitrage Segment A demand independent of segment B demand, and vice versa Firm Inputs Segment A Segment B No arbitrage q A X q B
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3 rd Degree Price Discrimination: a Simple Model = A + B = R A + R B –C A –C B –TFC FOCS: ∂∏ / q A = MR A –MC A = 0 ∂∏ / q B = MR B –MC B = 0 Ajaz Hussain. Department of Economics. University of Toronto (St. George) 5 MR A = MC A MR B = MC B M A = = 0 M B = = 0
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Example: Coke and Pepsi Ajaz Hussain. Department of Economics. University of Toronto (St. George) 6 Output Inputs Customer Syrup Output Distribution Output Retail Gamsi, Laffont, and Vuong in “Econometric Analysis of Collusive Behavior in a Soft Drink Market,” Journal of Economics and Management Strategy , Summer 1992 estimated demand for, and cost of, Coke and Pepsi concentrate syrup based on quarterly data from 1968 to 1986: Q c = 26.17 – 3.98P c + 2.25P p + 2.60A c – 0.62A p + 9.58S + 0.99 I Q p = 17.48 + 1.40P c – 5.48P p – 4.81A c + 2.83A p + 11.64S + 1.92 I TVC c = 5Q c , TVC p = 4Q p Q = quarterly quantity of syrup sold, P = price of syrup (1986 dollars), A = square root of quarterly advertising expenses (1986 dollars), S = equals 1 if spring or summer, equals 0 if winter or fall, I = real income (1986 dollars)
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Coke and Pepsi Demand Curves Average values from data: Q
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ajaz_204_2009_lecture_19 - University of Toronto Department...

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