Lecture 9 - PricingandAdvertising Mercedes Miranda BE530 1...

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Mercedes Miranda BE530 1 Pricing and Advertising
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2 Capturing Consumer Surplus Forms of Price Discrimination The Two-Part Tariff Bundling Advertising Lecture Outline
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3 price discrimination: Practice of charging different prices to different consumers for similar goods. A price-discriminating firm earns a higher profit from price discrimination because: it charges a higher price to customers who are willing to pay more than the uniform price, capturing some or all of their consumer surplus it sells to some people who were not willing to pay as much as the uniform price. 1. Capturing  Consumer Surplus
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4 Fig. 1 Capturing Consumer Surplus If a firm can charge only one price for all its customers, that price will be P * and the quantity produced will be Q *. Ideally, the firm would like to charge a higher price to consumers willing to pay more than P *, thereby capturing some of the consumer surplus under region A of the demand curve. The firm would also like to sell to consumers willing to pay prices lower than P *, but only if doing so does not entail lowering the price to other consumers. In that way, the firm could also capture some of the surplus under region B of the demand curve.
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5 2. Forms of Price Discrimination perfect price discrimination ( first-degree price discrimination ) - situation in which a firm sells each unit at the maximum amount any customer is willing to pay for it, so prices differ across customers and a given customer may pay more for some units than for others quantity discrimination ( second-degree price discrimination ) - situation in which a firm charges a different price for large quantities than for small quantities but all customers who buy a given quantity pay the same price multimarket price discrimination ( third degree price discrimination ) - a situation in which a firm charges different groups of customers different prices but charges a given customer the same price for every unit of output sold
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6 Fig. 2  First-Degree Price Discrimination   reservation price: Maximum price that a customer is willing to pay for a good. first-degree price discrimination: Practice of charging each customer her reservation price. Additional Profit from Perfect First- Degree Price Discrimination Because the firm charges each consumer her reservation price, it is profitable to expand output to Q **. When only a single price, P *, is charged, the firm’s variable profit is the area between the marginal revenue and marginal cost curves. With perfect price discrimination, this profit expands to the area between the demand curve and the marginal cost curve.
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7 Fig.  3 First-Degree Price Discrimination in Practice Perfect Price Discrimination The additional profit from producing and selling an incremental unit is now the  difference between demand and marginal cost. Imperfect Price Discrimination
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Lecture 9 - PricingandAdvertising Mercedes Miranda BE530 1...

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