Pricing

1
Pricing

• Perloff Chapter 12

2
Why price discriminate

• Downward sloping demand curve implies that
  consumers are prepared to pay differing prices
  for the good.
• Two reasons for higher profit
• Higher price to those prepared to pay it
• More sales through the lower price to those
  unwilling to pay the uniform price.

3
Conditions for price discrimination

• Market power
• Ability to change the price it charges
• Consumers must differ either
• in their individual willingness-to-pay for
  different units of the good
• in different consumers having different
  willingness-to-pay for the good
• Prevent resale

4
Types of price discrimination

• Perfect (first degree)
• Each unit of the good is sold at its maximum
  price.
• Quantity (second degree)
• Price determined by the volume of sales.
• Multimarket (third degree)
• Different groups charged different prices.

5
Perfect price discrimination
6
p, per unit
5
e
4
MC
3
Demand, Marginal revenue
MR

6
MR

5
MR

4
1
2
3
2
1
6
5
4
3
2
1
0
Q
, Units per day
Source Perloff
6
The efficiency of perfect price discrimination
Source Perloff
7
Quantity discrimination

• firm does not know which customers have highest
  reservation prices
• firm might know most customers are willing to pay
  more for first unit (demand slopes down)
• firm varies price each customer pays with number
  of units customer buys
• price varies only with quantity all customers
  pay the same price for a given quantity
• Various forms
• Bulk discounts
• Block pricing

8
Block pricing (individual consumer)
Source Perloff
9
Multimarket pricing
(b) United States
(a) Japan
p
, per unit
p
, per unit
US
J
4,500
3,500
CS
US
p

2,500
CS
US
J
p
2,000
J
D
J
D
US
p
US
p
J
DWL
J
DWL
US
500
M
C
500
M
C
MR
MR
J
US
0
Q


3,000
7,000
0
Q

2,000
4,500
J
US
Q
, Units per year
Q
, Units per year
J
US
Source Perloff
10
Profit maximising multimarket equilibrium
11
Efficiency of multimarket equilibrium
(a) Japan
(b) United States
4,500
p, per unit
p, per unit
3,500
CS
US
p

2,500
US
CS
J
p
2,000
J
D
D
J
US
p
US
p
J
DWL
J
DWL
US
500
M
C
500
M
C
MR
MR
J
US
0
Q


3,000
7,000
0
Q

2,000
4,500
J
US
Q
, Units per year
Q
, Units per year
J
US
Source Perloff
12
Efficiency of multimarket equilibrium

• Compared with competition, multimarket
  equilibrium is inefficient.
• Compared with a single price monopolist it the
  effect on efficiency is unclear.
• Deadweight loss is likely to be reduced because
  we move closer to perfect price discrimination.
• A new source of inefficiency is introduced.
  Consumers waste time looking for the best deal
  and the opportunity to trade with one another.

13
Two part tariff

• To purchase a good consumers pay
• A fixed fee
• A fee which varies with the amount consumed
• Telephone companies, Newcastle United season
  tickets.
• Principle
• Set price to maximise consumer surplus.
• Charge an amount equal to the consumer surplus to
  participate.

14
Two part tariff with identical consumers
p
, per unit
80
1
D
A


1,800
1
C


50
1
20
B

600

1
10
m
60
70
80
0
q
, Units per day
1
Source Perloff
15
Two part tariff with different consumers
(a) Consumer 1
(b) Consumer 2
p
, per unit
p
, per unit
100
80
D2
D1
A


3,200
2
A


1,800
1
C


50
C


50
2
1
20
20
600
B


B

800

1
2
10
m
10
m
60
70
80
0
90
100
80
0
q
, Units per day
q
, Units per day
1
2
Source Perloff
16
Tie in sales

• Customers buying a product are required to make
  subsequent purchases of a related product from
  the same firm.
• Car parts
• Printer cartridges
• Producer surplus increases at the expense of
  consumers.
• Efficiency probably increases because transaction
  costs are lowered.

17
Bundling

• Firms selling two or more goods can charge a
  price for a combination of goods.
• Meal deals.
• Bundling is profitable if willingness to pay for
  goods is negatively correlated across consumers.
• Consumers who are prepared to pay a high price
  for a burger have a low willingness-to-pay for
  the drink.