Chapter 11 Pricing w/Mkt Power

1. Chapter 11Pricing w/Mkt Power • Will cover 11.1 and 11.2. • Goal of firms with market power: capture CS and convert it to profits. • Issue: HOW firms with mkt power set prices to achieve this goal? • Key: if exists single mkt P, then some buyers willing to pay more than actually paying. • Solution: charge different prices to different consumers; also called price discrimination.

2. Three Types of Price Discrimination • 1st Degree Price Discrimination: • Extracts ALL the consumer surplus by charging each buyer exactly the amount he is willing to pay. • 2nd Degree PD: • Known as block pricing: selling first few Q at one price, next few Q at another price, etc. (discount for buying large quantity). • 3rd Degree PD: • Most common: dividing consumers into 2+ groups, each with own demand curve; charge different price to each group. • Examples: airline pricing; movies.

3. More on 3rd Degree Price Discrimination • Key: Must be able to identify the different groups and then keep them separate (I.e., enforce the different prices). • Firm’s process to pick different P’s and Q’s: • Pick total Q such that: MR1 = MR2 = MC. • Note: Charge higher price to the group with the lower price elasticity of demand.

4. Firm’s Approach when Using 3rd Degree PD • To start: One MC curve, two demand curves (so two MR curves). • See Figure 11.5. • Approach: • 1. Sum MR1 + MR2 = MRT. • 2. Pick QT where MRT = MC. • 3. At this MRT, find Q1 on MR1 and Q2 on MR2. • 4. Find P1 off of D1 at Q1 and find P2 off of D2 at Q2.