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Berkeley ECON 100A - Pricing

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Lectures 17 and 18Key issuesApplications and problemsNonuniform pricingSingle-price firmPrice-discriminating firm Extreme examples of tradeoffExampleExample Broadway theatersGeographic price discriminationSuccessful price discriminationPreventing resalesPrevent resales by raising transaction costsPrevent resales by vertically integratingPrevent resales by government interventionFlight of the Thunderbirds Thunderbirds (cont.)3 types of price discriminationPerfect-price-discriminating monopolyAll-knowing monopolyPerfect Price DiscriminationPerfect price discrimination propertiesProvidian Bancorp Doctors perfectly price discriminateAmazonBotox revisitedApplication Botox RevisitedSolved problemTableAnswer: Panel aIf firm perfectly price discriminatesTable Answer: Panel bQuantity discriminationUtility block pricingQuantity DiscriminationMultimarket price discriminationTheaterInternational price discrimination: CarsInternational price discrimination: SoftwarePrice discriminating: 2 groupsTo maximize total profitMultimarket Pricing of AiboProfit-maximizing conditionSolved problemAnswerCoca-Cola Version 1AnswerCoca-Cola Version 2AnswerSmuggling drugs from CanadaDrug price less abroadKerryBushSafetyBush’s “study”ImportsSolved problemAnswer: Price discriminationAnswer: PD (cont.)Answer: No price discriminationExampleGenerics and brand-name loyaltyEntry of genericsPrice effectsExplanationIdentifying an individual’s groupWhy firms use self-identificationGetting consumers to identify themselves: CouponsAirline tickets and hotel roomsReverse Auctions Why priceline worksWelfare effects of multimarket price discriminationGray marketsGray markets (cont.)Other forms of nonlinear pricingTwo-part tariffTwo-part tariff examplesPersonal seat licenseTwo-part tariff with identical consumersTwo-part tariff with nonidentical consumersCan distinguish/discriminateTwo-Part Tariff with Identical ConsumersCannot distinguish/discriminateTwo-Part TariffMonopoly doesn’t capture all CSWhy is price > marginal cost?Tie-in sales2 forms of tie-in salesRequirement tie-in salesIBM requirement tieBundlingSelling Raiders' season tickets When bundling increases profitCable TVComputer software suitesSupreme Court on tie-in salesCharge and responseSupreme Court rejects KodakeBay (English) auctionsWinnerSetting minimum bidCommon value auctionsCoin auctionsCoin auctions (cont.)1. Why and how firms price discriminate2. Perfect price discrimination3. Quantity discrimination4. Multimarket price discrimination5. Two-part tariffs6. Tie-in salesDocking Their PayLockoutDamagesWhyBackgroundOfferUnion ConcernsLectures 17 and 18PricingKey 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. smuggling drugs from Canada6. IBM requirement ties7. eBay auctionsNonuniform pricing• prices vary across customers or units• noncompetitive firms use nonuniform pricing to increase profitsSingle-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 salesExtreme 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 = revenueExamplePricingProfit from 10 College StudentsProfit from 20 SeniorsTotal ProfitUniform, $5 $50 $100 $150Uniform, $10 $100 $0 $100Price discriminate$100 $100 $200Example PricingProfit from 10 College StudentsProfit from 5 SeniorsTotal ProfitUniform, $5 $50 $25 $75Uniform, $10 $100 $0 $100Price discriminate$100 $25 $125Broadway 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 others• 2001: Bellagio Hotel, Las Vegas, charged art lovers $12 each to see Steve Martin’s art collection—Nevada residents paid only $6.Successful 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 othersPreventing 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


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Berkeley ECON 100A - Pricing

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