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1、,Chapter 11,Pricing with Market Power,Topics to be Discussed,Capturing Consumer Surplus Price Discrimination Intertemporal Price Discrimination and Peak-Load Pricing,2,Chapter 1,Topics to be Discussed,The Two-Part Tariff Bundling Advertising,3,Chapter 1,Introduction,Pricing without market power (per
2、fect competition) is determined by market supply and demand. The individual producer must be able to forecast the market and then concentrate on managing production (cost) to maximize profits.,4,Chapter 1,Introduction,Pricing with market power (imperfect competition) requires the individual producer
3、 to know much more about the characteristics of demand as well as manage production.,5,Chapter 1,Capturing Consumer Surplus,Quantity,$/Q,If price is raised above P*, the firm will lose sales and reduce profit.,6,Chapter 1,Capturing Consumer Surplus,P*Q*: single P & Q MC=MR A: consumer surplus with P
4、* B: PMC & consumer would buy at a lower price P1: less sales and profits P2 : increase sales & and reduce revenue and profits PC: competitive price,7,Chapter 1,Capturing Consumer Surplus,Quantity,$/Q,D,MR,Pmax,MC,PC,A,P*,Q*,P1,B,P2,Question How can the firm capture the consumer surplus in A and sel
5、l profitably in B?,Answer Price discrimination Two-part tariffs Bundling,8,Chapter 1,Capturing Consumer Surplus,Price discrimination is the charging of different prices to different consumers for similar goods.,9,Chapter 1,Price Discrimination,First Degree Price Discrimination Charge a separate pric
6、e to each customer: the maximum or reservation price they are willing to pay.,10,Chapter 1,Additional Profit From Perfect First-Degree Price Discrimination,Quantity,$/Q,Pmax,With perfect discrimination, each consumer pays the maximum price they are willing to pay.,11,Chapter 1,With perfect discrimin
7、ation Each customer pays their reservation price Profits increase,Additional Profit From Perfect First-Degree Price Discrimination,12,Chapter 1,Question Why would a producer have difficulty in achieving first-degree price discrimination? Answer 1)Too many customers (impractical) 2)Could not estimate
8、 the reservation price for each customer,Additional Profit From Perfect First-Degree Price Discrimination,13,Chapter 1,Price Discrimination,First Degree Price Discrimination The model does demonstrate the potential profit (incentive) of practicing price discrimination to some degree.,14,Chapter 1,Pr
9、ice Discrimination,First Degree Price Discrimination Examples of imperfect price discrimination where the seller has the ability to segregate the market to some extent and charge different prices for the same product: Lawyers, doctors, accountants Car salesperson (15% profit margin) Colleges and uni
10、versities,15,Chapter 1,First-Degree PriceDiscrimination in Practice,Quantity,$/Q,16,Chapter 1,Second-Degree Price Discrimination,Quantity,$/Q,17,Chapter 1,Second-Degree Price Discrimination,Quantity,$/Q,P0,Q0,P1,Q1,1st Block,P2,Q2,P3,Q3,2nd Block,3rd Block,Economies of scale permit: Increase consume
11、r welfare Higher profits,18,Chapter 1,Price Discrimination,Third Degree Price Discrimination 1) Divides the market into two-groups. 2)Each group has its own demand function.,19,Chapter 1,Price Discrimination,Third Degree Price Discrimination 3)Most common type of pricediscrimination. Examples: airli
12、nes, liquor, vegetables, discounts to students and senior citizens.,20,Chapter 1,Price Discrimination,Third Degree Price Discrimination 4) Third-degree price discrimination is feasible when the seller can separate his/her market into groups who have different price elasticities of demand (e.g. busin
13、ess air travelers versus vacation air travelers),21,Chapter 1,Price Discrimination,Third Degree Price Discrimination Objectives MR1 = MR2 MC1 = MR1 and MC2 = MR2 MR1 = MR2 = MC,22,Chapter 1,Price Discrimination,Third Degree Price Discrimination P1: price first group P2: price second group C(Qr) = to
14、tal cost of QT = Q1 + Q2 Profit ( ) = P1Q1 + P2Q2 - C(Qr),23,Chapter 1,Price Discrimination,Third Degree Price Discrimination Set incremental for sales to group 1 = 0,24,Chapter 1,Price Discrimination,Third Degree Price Discrimination Second group of customers: MR2 = MC MR1 = MR2 = MC,25,Chapter 1,P
15、rice Discrimination,Third Degree Price Discrimination Determining relative prices,26,Chapter 1,Price Discrimination,Third Degree Price Discrimination Determining relative prices Pricing: Charge higher price to group with a low demand elasticity,27,Chapter 1,Price Discrimination,Third Degree Price Di
16、scrimination Example: E1 = -2 & E2 = -4 P1 should be 1.5 times as high as P2,28,Chapter 1,Chapter 1,Slide 29,Third-Degree Price Discrimination,Quantity,$/Q,Chapter 1,Slide 30,Third-Degree Price Discrimination,Quantity,D2 = AR2,MR2,$/Q,D1 = AR1,MR1,MRT,Chapter 1,Slide 31,No Sales to Smaller Market,Even if third-degree price discrimination is feasible, it doesnt always pay
