Slide 1Capturing Consumer SurplusSlide 3The Trouble with Uniform Pricing (Figure 14.1)First-Degree (Perfect) Price DiscriminationFirst-Degree (Perfect) Price Discrimination (Figure 14.2)Price DiscriminationPrice Discrimination ExamplesPrice DiscriminationSecond-Degree Price DiscriminationSecond-Degree Price DiscriminationSlide 12Block Pricing with Five Blocks (Figure 14.5)Second-Degree Price DiscriminationTwo Part Pricing: ExampleTwo Part Pricing: ExampleTwo Part Pricing: ExampleBundling Multiple ProductsSlide 19Third-Degree Price DiscriminationThird-Degree Price DiscriminationSlide 22Allocating Sales Between Markets (Figure 14.6)Constructing the Marginal Revenue Curve (Figure 14.7)Slide 25Slide 2614-1Chapter 10:Advanced Pricing Models14-2Capturing Consumer SurplusUniform pricing~Charging the same price for every unit of the productPrice discrimination~More profitable alternative to uniform pricing~Market conditions must allow this practice to be profitably executed~Technique of charging different prices for the same product~Used to capture consumer surplus (turning consumer surplus into profit)14-314-4The Trouble with Uniform Pricing (Figure 14.1)14-5First-Degree (Perfect) Price DiscriminationEvery unit is sold for the maximum price each consumer is willing to pay~Allows the firm to capture entire consumer surplusDifficulties~Requires precise knowledge about every buyer’s demand for the good~Seller must negotiate a different price for every unit sold to every buyer14-6First-Degree (Perfect) Price Discrimination (Figure 14.2)14-7Price DiscriminationExists when the price-to-marginal cost ratio differs between two products:�A BA BP PMC MC14-8Price Discrimination Examples14-9Three conditions necessary to practice price discrimination profitably:1) Firm must possess some degree of market power2) A cost-effective means of preventing resale between lower- and higher-price buyers (consumer arbitrage) must be implemented3) Price elasticities must differ between individual buyers or groups of buyersPrice Discrimination14-10Second-Degree Price DiscriminationLower prices are offered for larger quantities and buyers can self-select the price by choosing how much to buyWhen the same consumer buys more than one unit of a good or service at a time, the marginal value placed on additional units declines as more units are consumed14-11Declining block pricing~Offers quantity discounts over successive discrete blocks of quantities purchasedSecond-Degree Price Discrimination14-1214-13Block Pricing with Five Blocks (Figure 14.5)14-14Second-Degree Price Discrimination14-15Two Part Pricing: Example•Cookies cost $0.40 for Alex’s Bakery to produce•Profit Maximizing price is $0.70 and Alex sells 6 cookies per customer per week with uniform pricing•If Alex sells the first 6 cookies for $0.70 and then additional cookies for $0.50, Alex sells 10 cookies per week (additional consumer surplus shaded gray, additional profit shaded red)14-16Two Part Pricing: Example•First 6 cookies are prices at $0.70. 7th cookie = $0.65. 8th cookie = $0.60. 9th cookie = $0.55. 10th cookie = $0.50. 11th cookie = $0.45. 12th cookie = $0.40. (additional profit shaded red)•Cookies start at $0.95 for the first cookie and prices decline by $0.05 for each additional cookie. (additional profit shaded red)14-17Two Part Pricing: Example•Customers pay a $3.60/week fee to join “Alex’s Cookie Club”. Cookies are sold for $0.40 for unlimited quanties.14-18When price discrimination is not possible, bundling multiple goods and charging a single price can be more profitable than charging individual prices for multiple goodsTwo conditions for profitable bundling~Consumers must have different demand prices for each good in the bundle~Demand prices must be negatively correlated across consumer typesBundling Multiple Products14-1914-20Third-Degree Price DiscriminationIf a firm sells in two markets, 1 & 2~Allocate output (sales) so MR1 = MR2~Optimal total output is that for which MRT = MCFor profit-maximization, allocate sales of total output so that MRT = MC = MR1 = MR214-21Equal-marginal-revenue principle~Allocating output (sales) so MR1 = MR2 which will maximize total revenue for the firm (TR1 + TR2)~More elastic market gets lower price~Less elastic market gets higher priceThird-Degree Price Discrimination14-2214-23Allocating Sales Between Markets (Figure 14.6)14-24Constructing the Marginal Revenue Curve (Figure 14.7)14-25Profit-Maximization Under Third-Degree Price Discrimination (Figure