CSUF ECON 315 - Managerial Economics & Business Strategy (44 pages)

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Managerial Economics & Business Strategy



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Managerial Economics & Business Strategy

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Lecture Notes


Pages:
44
School:
California State University, Fullerton
Course:
Econ 315 - Intermediate Business Microeconomics

Unformatted text preview:

Managerial Economics Business Strategy Chapter 11 Pricing Strategies for Firms with Market Power McGraw Hill Irwin Michael R Baye Managerial Economics and Business Strategy Copyright 2008 by the McGraw Hill Companies Inc All rights reserved 11 2 Overview I Basic Pricing Strategies Monopoly Monopolistic Competition Cournot Oligopoly II Extracting Consumer Surplus Price Discrimination Block Pricing Two Part Pricing Commodity Bundling III Pricing for Special Cost and Demand Structures Peak Load Pricing Cross Subsidies Transfer Pricing IV Pricing in Markets with Intense Price Competition Price Matching Brand Loyalty Randomized Pricing Standard Pricing and Profits for Firms with Market Power Price Profits from standard pricing 8 10 8 6 4 MC 2 P 10 2Q 1 2 3 4 5 MR 10 4Q Quantity 11 3 11 4 An Algebraic Example P 10 2Q C Q 2Q If the firm must charge a single price to all consumers the profit maximizing price is obtained by setting MR MC 10 4Q 2 so Q 2 P 10 2 2 6 Profits 6 2 2 2 8 A Simple Markup Rule Suppose the elasticity of demand for the firm s product is EF Since MR P 1 EF EF Setting MR MC and simplifying yields this simple pricing formula P EF 1 EF MC The optimal price is a simple markup over relevant costs More elastic the demand lower markup Less elastic the demand higher markup 11 5 An Example Elasticity of demand for Kodak film is 2 P EF 1 EF MC P 2 1 2 MC P 2 MC Price is twice marginal cost Fifty percent of Kodak s price is margin above manufacturing costs 11 6 Markup Rule for Cournot Oligopoly Homogeneous product Cournot oligopoly N total number of firms in the industry Market elasticity of demand EM Elasticity of individual firm s demand is given by EF N x EM Since P EF 1 EF MC Then P NEM 1 NEM MC The greater the number of firms the lower the profit maximizing markup factor 11 7 An Example Homogeneous product Cournot industry 3 firms MC 10 Elasticity of market demand Determine the profit maximizing price EF N EM 3 1 2 1 5 P EF 1 EF MC P 1 5 1 1 5 10 P 3 10 30 11



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