Price DiscriminationPrice Discrimination to Maximize ProfitThe ProblemSolution Vertical integration with the aircraft company or the cable company to avoid being undersold.SolutionALCOA’s Other ProductsMore Recent Vertical IntegrationRecent News from AlcoaSome controversyConclusionsPrice Discrimination and Vertical Price Discrimination and Vertical IntegrationIntegrationXi, Lillian, Xi, Lillian, BalveenBalveen, Fatima, Vanessa, Fatima, VanessaEEP 142 Spring 2009EEP 142 Spring 2009Who is ALCOA?Alcoa is the world leader in the production and management of primary aluminum, fabricated aluminum and alumina combined, through its active and growing participation in all major aspects of the industry. Alcoa serves the aerospace, automotive, packaging, building and construction, commercial transportation and industrial markets, bringing design, engineering, production and other capabilities of Alcoa's businesses to customers. In addition to aluminum products and components including flat‐rolled products, hard alloy extrusions, and forgings, Alcoa also markets Alcoa® wheels, fastening systems, precision and investment castings, and building syst ems. The Company has 97,000 employees in 34 countries and has been named one of the top most sustainable corporations in the world at the World Economic Forum in Davos, Switzerland. (Source: Alcoa Website)History• Aluminum Company of America (Alcoa) dominated the market for aluminum during the first half of the 20thcentury• 1912: Alcoa found guilty of using contracts to eliminate competitionand entering into non‐aggressiveness pact with foreign competitors.• 1940: A case against Alcoa is dismissed• 1945: Appellate court rules Alcoa guilty of antitrust violations.• Alcoa controlled 91% of the primary market. In the 1940 case, including the secondary market and excluding the aluminum used by Alcoa gave Alcoa 33% market share, not enough to be a monopoly. Judge Hand reversed that decision in 1945.‐Vertical Integration: When a single firm participates in more than one successive stage of the production process [example: American Apparel (fashion retailer) dyeing, finishing, designing, sewing, cutting, marketing, advertising and distribution of the company's product]‐Arbitrage: When a consumer purchases a good with the intent to immediately resell in another market at a higher price and enjoy t he profit‐Ingot: A chunk of metal (convenient for shaping, remelting, or refining)Uses of Aluminum IngotsIron and Steel Industry* Reducing AgentAircraft Industry*Airplane parts‐Electric Cable‐Cooking Utensils‐Automobile PartsSome DefinitionsPrice DiscriminationThe practice of charging different people different prices for the same goods or services. Goal: To capture more CS1. First degree price discrimination: occurs when identical goods are sold at different prices to each individual consumer.  Example: people will pay different prices for cars with identical features, and the salesperson must attempt to gauge the maximum price at which the car can be sold. 2. Second‐degree price discrimination: involves charging different prices for different quantities. Larger quantities are available at a lower unit price. •More common than first degree price discrimination•Sellers are not able to differentiate between different types of consumers Example: Retail stores‐ A reduced price may be offered if you buy two t‐shirts instead of just one. Helps rid merchandise faster and generate more revenue.Price Discrimination3. Third‐degree price discrimination: Third degree price discrimination can be achieved when the market can be segmented and when the segments have different elasticities of demand. In all cases it attempts to derive the most sales from each segmented “group” of consumers.•capable of differentiating between consumer classes Example: Soft drink from Safeways vs Movie Theatre, consumers with more inelastic Demand pay a higher Price.Example: Student and Senior discounts, Employee discountsWith Third‐degree price discrimination, Suppliers capture more market surplus than would be possible without price discrimination.Price DiscriminationPrice DiscriminationALCOA uses 3rd Degree Price Discrimination:They sorted consumers into Aircraft and Electric cable groups, each with their own price per unitAbove: Third Degree- Each segment is considered as a separate market with its own demand curve Essentially, the more prices that are introduced, the greater the sum of the revenue areas, and the more of the consumer surplus is captured by the producer. In the top diagram, a single price (P) is available to all cust omers. Revenue: P, A,Q, O. Consumer Surplus is the area above line segment P, A but below the demand curve (D). Price Discrimination to Price Discrimination to Maximize ProfitMaximize