9: Price Strategies and Discrimination
- Page ID
- 300601
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)- 9.1: 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.
- 9.2: Price Discrimination
- Price discrimination is the practice of charging different prices to different customers.
- 9.3: 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.
- 9.4: 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.
- 9.5: 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).
- 9.6: 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.
- 9.7: 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.
- 9.8: Perfect or First-Degree Price Discrimination
- This page explores perfect price discrimination, enabling sellers to charge buyers according to their maximum willingness to pay. It highlights first-degree price discrimination using car dealerships as an example. Although sellers typically lack knowledge of individual demand curves, they can employ pricing strategies, like bundle pricing and access fees, to approximate perfect discrimination.
- 9.9: Second-Degree Price Discrimination
- This page discusses second-degree price discrimination, where firms offer varied bundles at different prices to low and high demand consumer segments, allowing for self-selection. Bundle pricing encourages consumers to choose suitable options, ensuring that low-demand participants receive no surplus from smaller bundles, while high-demand consumers benefit from larger bundles.
- 9.10: Third-Degree Price Discrimination
- This page covers third-degree price discrimination, where sellers set different prices for customer groups based on demand elasticity, such as discounts for seniors or students. It highlights the need for sellers to identify segments, prevent reselling, and ensure varying elasticities to implement this strategy effectively.
- 9.11: Some Other Pricing Schemes
- This page explores pricing strategies including package pricing, contractual tie-in sales, and captive product pricing. Package pricing, or bundling, boosts revenue by selling combined items at a premium. Contractual tie-in sales capitalize on customer commitments to enhance revenue. Captive product pricing involves selling a primary item at a low cost while profiting from necessary high-margin replacements, ensuring a steady income stream.
- 9.12: Concluding Comments
- This page examines pricing strategies that help firms boost profits by converting consumer surplus, building on concepts from a previous chapter. It highlights how discriminatory pricing can outperform monopoly pricing in terms of social efficiency. Perfect price discrimination is noted for its ability to convert all consumer surplus into profit while preserving resource allocation efficiency and eliminating dead-weight loss.
- 9.14: Problem Sets
- This page examines price discrimination through exercises on access fees, per-unit pricing, and consumer surplus across market segments. It presents examples using individual inverse demand equations and marginal costs to derive access fees and customer prices. The content also includes multiple-choice questions that assess knowledge of different types of price discrimination—first-degree, second-degree, and third-degree—while covering concepts like consumer surplus and demand elasticities.