Chapter 12 - 5/24/2011 1 Chapter 12 Pricing and Advertising...

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Unformatted text preview: 5/24/2011 1 Chapter 12 Pricing and Advertising Everything is worth what its purchaser will pay for it. Publilius Syrus (first century BC) 12-2 ECO N201 – Spring 2011 Chapter 12 Outline 12.1 Why and How Firms Price Discriminate 12.2 Perfect Price Discrimination 12.3 Quantity Discrimination 12.4 Multimarket Price Discrimination 12.5 Two-Part Tariffs 12.6 Tie-In Sales 12.7 Advertising 12-3 ECO N201 – Spring 2011 12.1 Why and How Firms Price Discriminate • Why does Disneyworld charge local residents $369 for an annual pass and out-of-towners $489? • Why are airline fares less if you book in advance? • Why are computers and software bundled and sold at a single price? • Firms sometimes use nonuniform pricing , where prices vary across customers, to earn a higher profit. 5/24/2011 2 12-4 ECO N201 – Spring 2011 12.1 Why and How Firms Price Discriminate • A firm engages in price discrimination by charging consumers different prices for the same good based on • individual characteristics • belonging to an indentifiable sub-group of consumers • the quantity purchased • Two reasons why a firm earns a higher profit from price discrimination than uniform pricing: 1.Price-discriminating firms charge higher prices to customers who are willing to pay more than the uniform price. 2.Price-discriminating firms sell to some people who are not willing to pay as much as the uniform price. 12-5 ECO N201 – Spring 2011 12.1 Why and How Firms Price Discriminate • Necessary conditions for successful price discrimination: 1.A firm must have market power (otherwise it can’t charge a price above the competitive price). • Examples: monopoly, oligopoly, monopolistically competitive, cartel 2.A firm must be able to identify which consumers are willing to pay relatively more and there must be variation in consumers’ reservation price , the maximum amount someone is willing to pay. 3.A firm must be able to prevent or limit resale from customers who are charged a relatively low price to those who are charged a relatively high price. 12-6 ECO N201 – Spring 2011 12.1 Why and How Firms Price Discriminate • A firm’s inability to prevent resale is often the biggest obstacle to successful price discrimination. • Resale is difficult or impossible for services and when transaction costs are high. • Examples: haircuts, plumbing services, admission that requires showing an ID • Not all differential pricing is price discrimination. • It is not price discrimination if the different prices simply reflect differences in costs. • Example: selling magazines at a newsstand for a higher price than via direct mailing 5/24/2011 3 12-7 ECO N201 – Spring 2011 12.1 Types of Price Discrimination 1. First-degree • Also known as perfect price discrimination • Each unit sold for each customer’s reservation price 2. Second-degree • Also known as quantity discrimination • Firm charges a different price for large quantities than for small quantities...
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Chapter 12 - 5/24/2011 1 Chapter 12 Pricing and Advertising...

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