Econ 4001.01 1st Edition Lecture 19Outline of Last Lecture II. Pricing with Market PowerIII. Concentration Ratios and HHIIV. Market Power from Firm’s PerspectiveV. Price Discrimination: Capturing Consumer SurplusVI. Imperfect Price DiscriminationVII. Second Degree Price DiscriminationVIII. Third Degree Price DiscriminationOutline of Current Lecture IX. Illustration of Monopoly vs. Price DiscriminationX. Intertemporal Price DiscriminationXI. Two Part TariffsXII. Bundling-Forcing Consumers to Buy ProductsCurrent Lecture- Illustration of Monopoly vs. Price Discriminationo A price discriminator sells at any quantity on demand above MCo Monopolist has a set price and quantityo 3rd Degree Price Discrimination: high demanders pay a higher price and low demanders who have a lower willingness to pay will have a lower price- Intertemporal Price Discriminationo How might a firm increase profits if its product appeals to “early adopters” or “trend setters?” Price Skimming Strategy Early adopters have higher willingness to pay, lower price elasticity than “mass market” so they pay a higher price/two different curves exist(one for when the product is new and one for when the product is not as new) Example: books (new books>older books), movies, etc.o How might a firm increase profits if demand for its product is variable throughoutthe week or year? Peak load pricing Ex: restuarants offer discounts during the week, airline tickets (Tuesdays afternoon are the cheapest), amusement parks, etc.o How might a Peak load or Congestion PricingThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Two Part Tariffso If a monopolist wishes to maximize profit by taking away all consumer surplus, BUTo 1st degree price discrimination is impossible Firm doesn’t know details of consumer’s WTP Firms cant prevent resale 1st degree PD may cause antitrust actiono Firm can therefore charge a large fixed fee to all prospective consumers, and then a usage fee proportional to the quantity consumed this is a two part tariff Examples: copier rental/cell phone and data plans/tennis and golf private clubs (still have to pay for each round of golf or tennis)- Bundling-Forcing Consumers to Buy Productso Firms may sell products that consumers really want (over which they have monopoly power) only if they buy other items (which they may not want)o Examples: new car accessory packages, cable television packages, all inclusive resorts, Windows explorer bundled with Windows
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