Chapter 9 Explain why price discrimination and the existence of slightly

Chapter 9 explain why price discrimination and the

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Problem #5, Chapter 9Explain why price discrimination and the existence of slightly different variants of the same product tend to go hand in hand. Give an example from your own experience.
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Solution to Problem #5 (1) To capture a higher profit for itself, a monopoly produces less than the perfectly competitively output If it is legal, a monopoly will set a number of prices for a number of slightly differentiated products A monopoly can earn a higher profit by setting a pricing strategy that is able to identify different types of customer This pricing strategy requires so much information, particularly the distinctive characteristics and reservation price of the customers
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Solution to Problem #5 (2) When customers’ reservation prices are identified, a monopoly can then produce products that are slightly different from each other The differentiation should reveal the distinctive characteristics of the types of customer so that customers can self-select to the differentiated products As a result, price discrimination and existence of slightly different variants of the same product always come hand in hand
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Solution to Problem #5 (3) Example Automobile A typical automobile often comes in three options available to choose from The options are very similar to each other, but they are sold in three level of pricesThe cheapest option- a basic vehicle with manual transmission and no stereo system and air conditionerThe moderate option- a basic vehicle with auto transmission, stereo system, air conditioner and other automotive features, such as power seats and power locks
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Solution to Problem #5 (4) The most expensive option- a basic vehicle with all the features available on the moderate option plus some luxurious touches like sunroof and leather seats Low-income drivers tend to choose the cheapest option Average-income drivers tend to choose the moderate option High-income drivers tend to choose the most expensive option The monopoly is thus able to earning a profit by serving three types of customer with a differentiated product
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