# ch06 - Price Discrimination and Monopoly: Nonlinear Pricing...

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Chapter 6: Price Discrimination: Nonlinear Pricing 1 Price Discrimination and Monopoly: Nonlinear Pricing

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Chapter 6: Price Discrimination: Nonlinear Pricing 2 Introduction Annual subscriptions generally cost less in total than one- off purchases Buying in bulk usually offers a price discount these are price discrimination reflecting quantity discounts prices are nonlinear , with the unit price dependent upon the quantity bought allows pricing nearer to willingness to pay so should be more profitable than third-degree price discrimination How to design such pricing schemes? depends upon the information available to the seller about buyers distinguish first-degree (personalized) and second-degree (menu) pricing
Chapter 6: Price Discrimination: Nonlinear Pricing 3 First-degree price discrimination 1 Monopolist can charge maximum price that each consumer is willing to pay Extracts all consumer surplus Since profit is now total surplus, find that first-degree price discrimination is efficient

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Chapter 6: Price Discrimination: Nonlinear Pricing 4 First-degree price discrimination 2 Suppose that you own five antique cars Market research indicates that there are collectors of different types keenest is willing to pay \$10,000 for a car, second keenest \$8,000, third keenest \$6,000, fourth keenest \$4,000, fifth keenest \$2,000 sell the first car at \$10,000 sell the second car at \$8,000 sell the third car to at \$6,000 and so on total revenue \$30,000 Contrast with linear pricing: all cars sold at the same price set a price of \$6,000 sell three cars total revenue \$18,000
Chapter 6: Price Discrimination: Nonlinear Pricing 5 First-degree price discrimination 3 First-degree price discrimination is highly profitable but requires detailed information ability to avoid arbitrage Leads to the efficient choice of output: since price equals marginal revenue and MR = MC no value-creating exchanges are missed

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Chapter 6: Price Discrimination: Nonlinear Pricing 6 First-degree price discrimination 4 The information requirements appear to be insurmountable but not in particular cases tax accountants, doctors, students applying to private universities No arbitrage is less restrictive but potentially a problem But there are pricing schemes that will achieve the same outcome non-linear prices two-part pricing as a particular example of non-linear prices charge a quantity-independent fee (membership?) plus a per unit usage charge block pricing is another bundle total charge and quantity in a package
Chapter 6: Price Discrimination: Nonlinear Pricing 7 Two-part pricing 1 Jazz club serves two types of customer – Old: demand for entry plus Q o drinks is P = V o – Q o – Young: demand for entry plus Q y drinks is P = V y – Q y Equal numbers of each type – Assume that V o > V y : Old are willing to pay more than Young Cost of operating the jazz club C ( Q ) = F + cQ Demand and costs are all in daily units

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## This note was uploaded on 08/08/2011 for the course EC 170 taught by Professor Menegotto during the Fall '08 term at Tufts.

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ch06 - Price Discrimination and Monopoly: Nonlinear Pricing...

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