1 / 99

Chapter 12

Chapter 12. Pricing. Key issues. why and how firms price discriminate perfect price discrimination quantity discrimination multimarket price discrimination two-part tariffs tie-in sales. Nonuniform pricing. prices vary across customers or units

Faraday
Download Presentation

Chapter 12

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter 12 Pricing

  2. Key issues • why and how firms price discriminate • perfect price discrimination • quantity discrimination • multimarket price discrimination • two-part tariffs • tie-in sales

  3. Nonuniform pricing • prices vary across customers or units • noncompetitive firms use nonuniform pricing to increase profits

  4. Single-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 price

  5. Price-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 sales

  6. Extreme 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  = revenue

  7. Example 12.1a

  8. Example 12.1b

  9. Broadway theaters increase their profits 5% by price discriminating rather than by setting uniform prices

  10. Geographic 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

  11. 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 others

  12. Preventing resales • resales are difficult or impossible when transaction costs are high • resales are impossible for most services

  13. Prevent 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 country

  14. Prevent 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 purchasers

  15. Prevent 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 manufacturers

  16. Flight 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 a T-Bird south? • Ford is price discriminating between U.S. and Canadian customers • at the end of 2001, Canadians were paying $56,550 Cdn. (Thunderbird with the optional hardtop), while U.S. customers were spending up to $73,000 Cdn.

  17. Thunderbirds (cont.) • Canadian dealers try not to sell to buyers who will export the cars • dealers have signed an agreement with Ford that explicitly prohibits moving vehicles to the United States • dealers try to prevent resales because otherwise Ford may cut off their Thunderbirds or remove their dealership license • one dealer said, “It’s got to the point that if we haven’t sold you a car in the past, or we don’t otherwise know you, we’re not selling you one.” • nonetheless, many Thunderbirds were exported: eBay listed dozen of these cars on a typical day

  18. 3 types of price discrimination • perfect price discrimination (first-degree): sell each unit for the most each customer is willing to pay • quantity discrimination (second-degree): charges a different price for larger quantities than for smaller ones • multimarket price discrimination (third-degree): charge groups of customers different prices

  19. Perfect-price-discriminating monopoly • has market power • can prevent resales • knows how much each customer is willing to pay for each unit purchase (all knowing)

  20. All-knowing monopoly sells each unit at its reservation price • maximum price consumers will pay (captures all possible consumer surplus) • height of demand curve • MR is the same as its price (AR)

  21. Figure 12.1 Perfect Price Discrimination p , $ per unit 6 5 e MC 4 3 Demand, Marginal revenue MR = $6 MR = $5 MR = $4 1 2 3 2 1 0 1 2 3 4 5 6 Q , Units per day

  22. Perfect price discrimination properties • perfect price discrimination is efficient • competition and a perfectly discriminating monopoly • sell the same quantity • maximize total welfare: W = CS + PS • have no deadweight loss • consumers worse off (CS = 0) than with competition

  23. p , $ per unit p 1 MC A e s p s B C e p = MC c c c E D MC s Demand, MR d MC 1 MR s Q Q = Q , Units per day Q c s d

  24. Amazon • in 2000, Amazon revealed that it used “dynamic pricing”: gauges shopper’s desire and means, charges accordingly • example • a man ordered DVD of Julie Taymor’s “Titus” at $24.49 • checks back next week and finds price is $26.24 • removes cookie: price fell to $22.74 • after newspaper articles, Amazon announced it had dropped this policy

  25. Botox revisited • how much more would Allergan earn from Botox if it could perfectly price discriminate?

  26. Application Botox Revisited , p $ per vial 143.0 ≈ A $187.5 million e s 75.0 Demand B ≈ $375 million C ≈ $187.5 million e c 7.5 MC 1.30 2.61 2.75 0 MR Q , Million daily doses of Botox

  27. Solved problem How does welfare change if firm in Table 12.1 goes from charging a single price to perfectly price discriminating?

  28. Table 12.1a

  29. Answer: Panel a • welfare is same with single price or price discrimination because output unchanged • single price: if theater sets a single price of $5 • it sells 30 tickets and  = $150 • 20 seniors pay their reservation price so CS = 0 • 10 college students (reservation prices of $10) have CS = $50 • welfare = $200 = profit ($150) + consumer surplus ($50)

  30. If firm perfectly price discriminates • it charges all customers their reservation price so there’s no consumer surplus • seniors pay $5 and college students, $10 • firm's profit rises to $200 • welfare W = $200 = profit ($200) + CS ($0) is same under both pricing systems where output stays the same

  31. Table 12.1b

  32. Answer: Panel b • welfare is greater with perfect price discrimination where output increases • if theater sets single price of $10 • only college students attend and have CS = 0 •  = $100 • W = $100 • if it perfectly price discriminates: • CS = 0 •  =$125 • W = $125

  33. 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 • note: not all quantity discounts are a form of price discrimination

  34. Utility block pricing • public utility (electricity, water, gas…) charges • one price for the first few units (a block) of usage • different price for subsequent blocks • both declining-block and increasing-block pricing are common

  35. (a) Quantity Discrimination (b) Single-Price Monopoly p , $ per unit p , $ per unit 2 1 90 90 A = $200 70 E = $450 60 C = $200 50 F B = = $900 D = $1,200 = G $450 $200 m m 30 30 Demand Demand MR 0 30 90 0 20 40 90 Q , Units per day Q , Units per day Figure 12.3 Quantity Discrimination

  36. Multimarket price discrimination • firm knows only which groups of customers are likely to have higher reservation prices than others • firm divides potential customers into two or more groups • firms set a different price for each group

  37. Theater • senior citizens pay a lower price than younger adults at movie theaters • by admitting people as soon as they demonstrate their age and buy tickets, theater prevents resales

  38. International price discrimination: Cars • even including shipping and customs, European price for BMW 750IL • price is 13.6% more from an American firm than imported from Europe

  39. International price discrimination: Software • Australia's Prices Surveillance Agency criticized American software industry for charging Australians 49% more than Americans, • then, Agency called for an end to import restrictions so that Australian retailers could import software directly

  40. Price discriminating: 2 groups • marginal cost = m • monopoly charges Group i members pi for Qi units • profit from Group i is i= piQi – mQi

  41. To maximize total profit • monopoly sets its quantities so that marginal revenue for each group i, MRi, equals common marginal cost, m: MR1 = m = MR2. • example: Sony’s Aibo robot dog

  42. Figure 12.4 Multimarket Pricing of Aibo (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

  43. Profit-maximizing condition • MRi = pi(1 + 1/i), so • MR1=p1(1 + 1/1) = m = p2(1 + 1/2) = MR2

  44. Solved problem • monopoly sells in two markets • constant elasticity of demand is • 1 = -2 in first market • 2 = -4 in second market • MC = $1 • resales are impossible • what prices should monopoly charge?

  45. Answer  p1 = 1/(1 – ½) = 2 p2 = 1/(1 – ¼) = 4/3 p1/p2 = 2/(4/3) = 1.5

  46. Coca-Cola Version 1 • a two-liter bottle of Coke costs 50% more in the U.K. than in EU nations (SF Chronicle, May 17, 2000: D2) • if Coke’s marginal cost is the same for all European nations, how does the demand in the U.K. differ from that in the EU?

  47. Answer • pUK/pEU = 1.5 • an example that is consistent with this ratio is UK = - 2 and EU = -4 • generally: or 1.5EU - UK = 0.5 UK EU

  48. Generics and brand-name loyalty Why do prices of some brand-name pharmaceutical drugs rise when equivalent, generic brands enter the market?

  49. Entry of generics • generics enter when patent for profitable drug expires • generics: 40% of U.S. pharmaceutical sales by volume • name-brand drugs with sales of about $20 billion went off patent by 1997 • most states allow/require pharmacist to switch prescription from more expensive brand-name product to generic unless doctor or patient object

  50. Price effects 18 major orally-administered drug products that faced generic competition 1983-1987 • on average for each drug, 17 generic brands entered and captured 35% of total sales in first year • price effects • brand-name drug prices rose an average of 7% • but average market price fell over 10% • because generic price was only 46% of brand-name price

More Related