4: Pricing with Market Power
- Page ID
- 43139
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- 4.1: Introduction to Pricing with Market Power
- In economics, the firm’s objective is assumed to be to maximize profits. Firms with market power do this by capturing consumer surplus, and converting it to producer surplus. A monopoly finds the profit-maximizing price and quantity by setting MR equal to MC. This strategy maximizes profits for a firm setting a single price and charging all customers the same price. In some situations, it is possible for a monopolist to increase profits beyond the single price monopoly solution.
- 4.2: Price Discrimination
- Price discrimination is the practice of charging different prices to different customers.
- 4.3: Intertemporal Price Discrimination
- Intertemporal price discrimination provides a method for firms to separate consumer groups based on willingness to pay. The strategy involves charging a high price initially, then lowering price after time passes. Many technology products and recently-released products follow this strategy.
- 4.4: Peak Load Pricing
- The demand for many goods is larger during certain times of the day or week. For example, roads are congested during rush hours during the morning and evening commutes. Electricity has larger demand during the day than at night. Ski resorts have large (peak) demands during the weekends, and smaller demand during the week.
- 4.5: Two-Part Pricing
- A monopoly or any firm with market power can increase profits by charging a price structure with a fixed component, or entry fee, and a variable component, or usage fee. Two-Part Pricing (also called Two Part Tariff) is a form of pricing in which consumers are charged both an entry fee (fixed price) and a usage fee (per-unit price).
- 4.6: Bundling
- Bundling is the practice of selling two or more goods together as a package. Bundling is a widely-practiced sales strategy that takes advantage of differences in consumer willingness to pay for different goods.
- 4.7: Advertising
- Advertising is a huge industry, with billions spent every year on marketing products. Are these enormous expenditures worth it? The benefits of increased sales and revenues must be at least as large as the increased costs to make it a good investment. In this section, the profit-maximizing level of advertising will be identified and evaluated.