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Slides5_Prices - The Information Economy Prices(or Lack...

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The Information Economy Prices (or Lack Thereof) 1
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Basic Monopoly Pricing 2
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Monopoly Pricing: Recap 3 Constant marginal cost, c. Firm chooses quantity to maximize profits First-order condition Inverse elasticity rule ) ) ( ( ) ( c q p q q c q MR ) ( dp dq q p e e p c p where 1
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Multi-product monopolist 4 Microsoft sells Windows and MSOffice If sell separately optimal prices p w =200, p o =200. But they sell both: how should they price them? Knopf sells Tony Blair’s biography in Kindle and hardcover If sell separately optimal prices p k =10, p h =20. But they sell both: how should they price? Economist sells print and online editions How should they price?
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Multi-product monopolist 5 Firm chooses (q 1 ,q 2 ) to maximize Inverse elasticity rule for p 1 Substitutes: e 12 <0 Negative externality so increase p 1 . Complements: e 12 >0 Positive externality so reduce p 1 . ) ) , ( ( ) ) , ( ( ) , ( 2 2 1 2 2 1 2 1 1 1 2 1 c q q p q c q q p q q q 1 2 2 1 12 12 11 1 1 2 2 2 11 1 1 1 where ) ( 1 dp dq q p e e e q p q c p e p c p
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Price Discrimination 6
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Three types of price discrimination 7 1. First-degree Perfect price discrimination. Theoretical ideal. 2. Third-degree (group pricing) Price as function of observables. Examples: Student status, zip code, assets. 3. Second-degree (indirect price discrimination) Offer menu of options and let people self-select. Examples: Versioning, quantity discounts. Pricing often has elements of both second- and third- degree price discrimination.
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First-Degree Price Discrimination 8 Suppose know customer’s demand curve, p(q). Firm can extract all consumer surplus Let welfare maximizing quantity be q*, so that p(q*)=c. Three ways to extract 1. Block pricing: sell q* units at W(q*)=∫ 0 q* p(q)dq 2. Two- part tariff: price p=c and fee CS(q*)= W(q*)=∫ 0 q* [p(q)-c]dq 3. Nonlinear prices: Sell q th unit for price p(q). Big assumptions Know customers demand. Able to charge different prices to different customers.
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Third-Degree Price Discrimination 9 Firm can observe customer characteristics Country (e.g. book prices) Student status (e.g. airline tickets) Individual pricing (e.g. Lexis-Nexis and Universities) Optimal pricing: Use inverse elasticity rule for each group. Lower price to most sensitive groups. Assumptions No resale (e.g. international editions of textbooks) No cost to setting different prices Cannot change characteristics (e.g. hide student card) No ethical issues (e.g. racial discrimination in car sales) Consumer demand and observable characteristics are correlated Has internet made easier or harder?
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Second-Degree Price Discrimination 10 Offer menu of products and see which consumers choose High and low quality products (vertical differentiation).
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