1Chapter 12PricingKey issues1. why and how firms price discriminate2. perfect price discrimination3. quantity discrimination4. multimarket price discrimination5. two-part tariffs6. tie-in salesApplications and problems1.Broadway theaters2.Providian tries to perfectly price discriminate3.Amazon dynamic pricing4.Coca Cola: Japan & U.S.5.IBM requirement ties6.eBay auctionsNonuniform pricing• prices vary across customers or units• noncompetitive firms use nonuniform pricing to increase profits Single-price firm• nondiscriminating firm faces a trade-off between charging• maximum price to consumers who really want good • low enough price that less enthusiastic customers still buy• as a result, single-price firm usually sets an intermediate pricePrice-discriminating firm • avoids this trade-off• earns a higher profit by charging• higher price to those willing to pay more than the uniform price: captures their consumer surplus• lower price to those not willing to pay as much as the uniform price: extra sales2Extreme examples of tradeoff• maximum customers will pay for a movie:• college students, $10• senior citizens, $5• theater holds all potential customers, so MC= 0• no cost to showing the movie,so π = revenueExample 12.1a $200$100$100Price discriminate$100$0$100Uniform, $10$150$100$50Uniform, $5Total ProfitProfit from 20 SeniorsProfit from 10 College StudentsPricingExample 12.1b$125$25$100Price discriminate$100$0$100Uniform, $10$75$25$50Uniform, $5Total ProfitProfit from 5 SeniorsProfit from 10 College StudentsPricingBroadway theatersincrease their profits 5% by price discriminating rather than by setting uniform pricesGeographic price discrimination• admission to Disneyland is $38 for out-of-state adults and $28 for southern Californians• tuition at New York’s Fordham University is $4,000 less for commuting first-year students than for othersSuccessful price discrimination• requires that firm have market power • consumers have different demand elasticities, and firm can identify how consumers differ• firm must be able to prevent or limit resales to higher-price-paying customers by others3Preventing resales• resales are difficult or impossible when transaction costs are high• resales are impossible for most servicesPrevent resales by raising transaction costs• price-discriminating firms raise transaction costs to make resales difficult• applications:• U.C. Berkeley requires anyone with a student ticket to show a student picture ID• Nikon warranties cover only cameras sold in this countryPrevent resales by vertically integrating• VI: participate in more than one successive stage of the production and distribution chain for a good or service• VI into the low-price purchasersPrevent resales by government intervention• governments require that milk producers charge higher price for fresh use than for processing (cheese, ice cream) and forbid resales • governments set tariffs limiting resales by making it expensive to import goods from lower-price countries• governments used trade laws to prevent sales of certain brand-name perfumes except by their manufacturersFlight of the Thunderbirds • 2002 production run of 25,000 new Thunderbirds included only 2,000 for Canada• potential buyers are besieging Ford dealers in Canada• many hope to make a quick profit by reselling these cars in the United States• reselling is relatively easy and shipping costs are relatively low• why ship a T-Bird south?• Ford is price discriminating between U.S. and Canadian customers• at the end of 2001, Canadians were paying $56,550 Cdn. (Thunderbird with the optional hardtop), while U.S. customers were spending up to $73,000 Cdn.Thunderbirds (cont.)• Canadian dealers try not to sell to buyers who will export the cars• dealers have signed an agreement with Ford that explicitly prohibits moving vehicles to the United States• dealers try to prevent resales because otherwise Ford may cut off their Thunderbirds or remove their dealership license• one dealer said, “It’s got to the point that if we haven’t sold you a car in the past, or we don’t otherwise know you, we’re not selling you one.”• nonetheless, many Thunderbirds were exported: eBay listed dozen of these cars on a typical day43 types of price discrimination• perfect price discrimination (first-degree): sell each unit for the most each customer is willing to pay • quantity discrimination (second-degree): charges a different price for larger quantities than for smaller ones• multimarket price discrimination (third-degree): charge groups of customers different pricesPerfect-price-discriminating monopoly• has market power• can prevent resales• knows how much each customer is willing to pay for each unit purchase (all knowing)All-knowing monopolysells each unit at its reservation price• maximum price consumers will pay (captures all possible consumer surplus)• height of demand curve• MR is the same as its price (AR)Figure 12.1 Perfect Price Discriminationp, $ per unit654321Q, Units per day6543210MCeDemand, Marginal revenueMR1= $6 MR2= $5 MR3= $4Perfect price discrimination properties• perfect price discrimination is efficient• competition and a perfectly discriminating monopoly• sell the same quantity• maximize total welfare: W = CS + PS• have no deadweight loss• consumers worse off (CS = 0) than with competitionscdp, $ per unitEDCBAQ, Units per dayQQ=QMCsDemand, MRMRspc= MCcecespsp1MC1MCd5Providian Bancorp • sends middle- and lower-income consumers who need to borrow substantial sums of money fliers that offer “the lowest interest rate” • when a customer calls, an employee uses a computer model and the individual's credit history to negotiate a customized (high) interest rate, credit line, and other termsDoctors perfectly price discriminate• “selfless” doctor charges poor patients less: charitable or price discriminating?• many doctors ask patients where they live, what’s their job, and other non-medical questions • answers help doctor estimates patient’s earnings/wealth and hence willingness to payAmazon• in 2000, Amazon revealed that it used “dynamic pricing”: gauges shopper’s desire and means, charges accordingly• example • a man ordered DVD of Julie Taymor’s “Titus” at $24.49• checks back next week and finds price is $26.24• removes cookie: price fell to $22.74• after newspaper
View Full Document
Unlocking...