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Unformatted text preview: Chapter 11: Pricing with Market Power CHAPTER 11 PRICING WITH MARKET POWER TEACHING NOTES The chapter begins with a discussion of the basic objective of every pricing strategy, which is to capture as much consumer surplus as possible and convert it into additional profit for the firm. The remainder of the chapter explores different methods of capturing the surplus. Section 11.2 discusses first, second, and third degree price discrimination, section 11.3 discusses intertemporal price discrimination and peak load pricing, section 11.4 discusses the two-part tariff, section 11.5 discusses bundling, and section 11.6 discusses advertising. If you are pressed for time you can pick and choose between sections 11.3 to 11.6. The chapter contains an excellent array of examples of how price discrimination is applied in different types of markets, not only in the formal examples but also in the body of the text. Although the graphs can seem very complicated to students, the challenge of figuring out how to price discriminate in a specific case can be quite stimulating and can promote many interesting class discussions. The Appendix to the chapter can be difficult for most students and should not be covered in class unless you are teaching a mathematical or business-oriented course. Should you choose to include the Appendix, make sure students have an intuitive feel for the model before presenting the algebra or geometry. When introducing this chapter, highlight the requirements for profitable price discrimination: (1) supply-side market power, (2) the ability to separate customers, and (3) differing demand elasticities for different classes of customers. The discussion of first-degree price discrimination begins with the concept of a reservation price. The text uses reservation prices throughout the chapter. Since the discussion of Figure 11.2 may be confusing to students, an alternative presentation could begin with a diagram similar to Figure 9.1, with the addition of information from Figure 10.10. Show that with first-degree price discrimination the monopolist captures deadweight loss and all consumer surplus. Also, stress that with perfect price discrimination the marginal revenue curve coincides with the demand curve. First-degree price discrimination is best followed by the discussion on third-degree, rather than second-degree, price discrimination. When you do cover second-degree price discrimination, note that many utilities currently charge higher prices for larger blocks. (Use your own electricity bill as that many utilities currently charge higher prices for larger blocks....
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- Spring '09