Monopoly Behavior презентация

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Monopoly BehaviorA Scotsman phones a dentist to inquire about the cost for— "I can't guarantee their professionalism and it'll be painful. ButHow Should a Monopoly Price?
 So far a monopoly has beenCapturing Consumer Surplus
 All pricing strategies we will examine are meansCapturing Consumer SurplusCapturing Consumer Surplus
 Price discrimination is the practice of charging differentPrice discrimination
 Price discrimination requires the absence of resaleTypes of Price Discrimination
 1st-degree: Each output unit is sold atTypes of Price Discrimination
 3rd-degree: Price paid by buyers in aFirst-degree Price Discrimination
 Each output unit is sold at a differentFirst-degree Price DiscriminationFirst-degree Price DiscriminationFirst-degree Price DiscriminationFirst-degree Price DiscriminationFirst-degree Price DiscriminationFirst-degree Price DiscriminationFig. 25.2First-degree Price Discrimination
 First-degree price discrimination gives a monopolist all ofFirst-Degree Price Discrimination
 In practice, perfect price discrimination is almost neverFirst-Degree Price Discrimination
 Examples of imperfect price discrimination where the sellerSecond-Degree Price Discrimination
 In some markets, consumers purchase many units ofSecond-Degree Price Discrimination
 Quantity discounts are an example of second-degree priceSecond-Degree Price DiscriminationFig. 25.3Fig. 25.3Fig. 25.3Fig. 25.3Third-degree Price Discrimination
 Price paid by buyers in a given groupThird-degree Price Discrimination
 A monopolist manipulates market price by altering thePRICE DISCRIMINATIONPRICE DISCRIMINATIONPRICE DISCRIMINATIONThird-degree Price DiscriminationThird-degree Price DiscriminationThird-degree Price Discrimination
 In which market will the monopolist cause theThird-degree Price Discrimination
 In which market will the monopolist cause theThird-degree Price Discrimination
 In which market will the monopolist cause theThird-degree Price DiscriminationThird-degree Price DiscriminationThird-degree Price DiscriminationThird-degree Price DiscriminationNo Sales to Smaller Market
 Even if third-degree price discrimination isNo Sales to Smaller MarketThe Economics of Coupons  and Rebates
 Those consumers who areThe Economics of Coupons  and Rebates
 About 20 – 30%Price Elasticities of Demand: Users vs. Nonusers of CouponsAirline Fares
 Differences in elasticities imply that some customers will payElasticities of Demand for  Air TravelAirline Fares
 There are multiple fares for every route flown byOther Types of Price Discrimination
 Intertemporal Price Discrimination
 Practice of separatingIntertemporal Price Discrimination
 Once this market has yielded a maximum profit,Intertemporal Price DiscriminationOther Types of Price Discrimination
 Peak-Load Pricing
 Practice of charging higherPeak-Load Pricing
 Objective is to increase efficiency by charging customers closePeak-Load Pricing
 With third-degree price discrimination, the MR for all marketsPeak-Load PricingHow to Price a Best-Selling Novel
 How would you arrive atHow to Price a Best-Selling Novel
 Company must divide consumers intoHow to Price a Best-Selling Novel
 Publishers must use estimates ofTwo-Part Tariffs
 A two-part tariff is a lump-sum fee, p1, plusTwo-Part Tariffs
 Should a monopolist prefer a two-part tariff to uniformTwo-Part Tariffs
  			p1 + p2x
 Q: What is the largestTwo-Part Tariffs
  			p1 + p2x
 Q: What is the largestTwo-Part TariffsTwo-Part TariffsTwo-Part TariffsTwo-Part TariffsTwo-Part TariffsTwo-Part TariffsTwo-Part TariffsTwo-Part TariffsTwo-Part TariffsTwo-Part TariffsTwo-Part Tariffs
 The monopolist maximizes its profit when using a two-partTwo-Part Tariffs
 A profit-maximizing two-part tariff gives an efficient market outcomeThe Two-Part Tariff
 Form of pricing in which consumers are chargedThe Two-Part Tariff
 Pricing decision is setting the entry fee (T)Two-Part Tariff with a Single ConsumerTwo-Part Tariff with Two Consumers
 Two consumers, but firm can onlyTwo-Part Tariff with Two ConsumersTwo-Part Tariff with Two Consumers
 Firm should set usage fee aboveThe Two-Part Tariff with Many Consumers
 No exact way to determineThe Two-Part Tariff with Many Consumers
 To find optimum combination, chooseTwo-Part Tariff with Many Different ConsumersThe Two-Part Tariff
 Rule of Thumb
 Similar demand: Choose P closeThe Two-Part Tariff With a Twist
 Entry price (T) entitles thePolaroid Cameras
 In 1971, Polaroid introduced the SX-70 camera
 Polaroid wasPolaroid Cameras
 Buying camera is like entry fee
 Unlike an amusementPolaroid Cameras
 Analytical framework:Polaroid Cameras
 In the end, the film prices were significantly aboveBundling
 Bundling is packaging two or more products to gain aBundling
 When film company leased “Gone with the Wind,” it requiredBundling
 Renting the movies separately would result in each theater payingBundling
 If the movies are bundled:
 Theater A will pay $15,000Relative Valuations
 More profitable to bundle because relative valuation of twoRelative Valuations
 If the demands were positively correlated (Theater A wouldBundling
 If the movies are bundled:
 Theater A will pay $16,000Bundling
 Bundling Scenario: Two different goods and many consumers
 Many consumersReservation PricesConsumption Decisions When Products are Sold SeparatelyConsumption Decisions When Products are BundledConsumption Decisions When Products are Bundled
 The effectiveness of bundling dependsReservation PricesReservation PricesMovie ExampleMixed Bundling
 Practice of selling two or more goods both asMixed Versus Pure BundlingMixed Bundling – Example
 Demands are perfectly negatively correlated but significantMixed Bundling – Example
 We can see the effects under differentBundling
 If MC is zero, mixed bundling can still be moreMixed Bundling with Zero Marginal CostsBundling in Practice
 Car purchasing
 Bundles of options such as electricBundling
 Mixed Bundling in Practice
 Use of market surveys to determineMixed Bundling in PracticeA Restaurant’s Pricing ProblemTying
 The practice of requiring a customer to purchase one goodTying
 Allows the seller to meter the customer and use aVersioning
 Extreme example: damaged goods
  Intel 486
 486SX - $333Durable-goods pricing
 Waiting for the price cut.
 Non-price discrimination seems toAdvertising
 Firms with market power have to decide how much toAdvertising
 Assumptions
 Firm sets only one price for product
 Firm knowsADVERTISINGAdvertising
 A Rule of Thumb for Advertising
 To maximize profit, theAdvertising
 An Example
 R(Q) = $1 million/yr
 $10,000 budget for AAdvertising
 The firm in our example should increase advertising
 A/PQ =Advertising – In Practice
 Estimate the level of advertising for each


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Monopoly Behavior


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A Scotsman phones a dentist to inquire about the cost for a tooth extraction : A Scotsman phones a dentist to inquire about the cost for a tooth extraction : — "85 pounds for an extraction, sir" the dentist replied. ** "85 quid ! Huv ye no'got anythin' cheaper ?„ — "That's the normal charge,” said the dentist. ** "Whit about if ye didn’t use any anesthetic ?„ — "That's unusual, sir, but I could do it and it would knock 15 pounds off". ** "What aboot if ye used one of your dentist trainees and still without any anesthetic ?"

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— "I can't guarantee their professionalism and it'll be painful. But the price could drop by 20 pounds.” — "I can't guarantee their professionalism and it'll be painful. But the price could drop by 20 pounds.” ** "How aboot if ye make it a trainin' session, have yer student do the extraction with the other students watchin' and learning‚?„ — "It'll be good for the students", mulled the dentist. "I'll charge you 5 pounds but it will be traumatic". ** " It's a deal,” said the Scotsman. "Can ye confirm an appointment for my wife next Tuesday then ?"

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How Should a Monopoly Price? So far a monopoly has been thought of as a firm which has to sell its product at the same price to every customer. This is uniform pricing. Can price-discrimination earn a monopoly higher profits?

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Capturing Consumer Surplus All pricing strategies we will examine are means of capturing consumer surplus and transferring it to the producer Profit maximizing point of P* and Q* But some consumers will pay more than P* for a good Raising price will lose some consumers, leading to smaller profits Lowering price will gain some consumers, but lower profits

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Capturing Consumer Surplus

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Capturing Consumer Surplus Price discrimination is the practice of charging different prices to different consumers for similar goods Must be able to identify the different consumers and get them to pay different prices Other techniques that expand the range of a firm’s market to get at more consumer surplus Tariffs and bundling

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Price discrimination Price discrimination requires the absence of resale

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Types of Price Discrimination 1st-degree: Each output unit is sold at a different price. Prices may differ across buyers. 2nd-degree: The price paid by a buyer can vary with the quantity demanded by the buyer. But all customers face the same price schedule. E.g., bulk-buying discounts.

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Types of Price Discrimination 3rd-degree: Price paid by buyers in a given group is the same for all units purchased. But price may differ across buyer groups. E.g., senior citizen and student discounts vs. no discounts for middle-aged persons.

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First-degree Price Discrimination Each output unit is sold at a different price. Price may differ across buyers. It requires that the monopolist can discover the buyer with the highest valuation of its product, the buyer with the next highest valuation, and so on.

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First-degree Price Discrimination

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First-degree Price Discrimination

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First-degree Price Discrimination

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First-degree Price Discrimination

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First-degree Price Discrimination

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First-degree Price Discrimination

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Fig. 25.2

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First-degree Price Discrimination First-degree price discrimination gives a monopolist all of the possible gains-to-trade, leaves the buyers with zero surplus, and supplies the efficient amount of output.

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First-Degree Price Discrimination In practice, perfect price discrimination is almost never possible Impractical to charge every customer a different price (unless very few customers) Firms usually do not know reservation price of each customer Firms can discriminate imperfectly Can charge a few different prices based on some estimates of reservation prices

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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, priests, policemen Car salesperson (15% profit margin) Colleges and universities (differences in financial aid)

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Second-Degree Price Discrimination In some markets, consumers purchase many units of a good over time Demand for that good declines with increased consumption Electricity, water, heating fuel Firms can engage in second-degree price discrimination Practice of charging different prices per unit for different quantities of the same good or service

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Second-Degree Price Discrimination Quantity discounts are an example of second-degree price discrimination Ex: Buying in bulk at Sam’s Club Block pricing – the practice of charging different prices for different quantities of “blocks” of a good Ex: electric power companies charge different prices for a consumer purchasing a set block of electricity

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Second-Degree Price Discrimination

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Fig. 25.3

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Fig. 25.3

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Fig. 25.3

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Fig. 25.3

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Third-degree Price Discrimination Price paid by buyers in a given group is the same for all units purchased. But price may differ across buyer groups.

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Third-degree Price Discrimination A monopolist manipulates market price by altering the quantity of product supplied to that market. So the question “What discriminatory prices will the monopolist set, one for each group?” is really the question “How many units of product will the monopolist supply to each group?”

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PRICE DISCRIMINATION

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PRICE DISCRIMINATION

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PRICE DISCRIMINATION

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Third-degree Price Discrimination

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Third-degree Price Discrimination

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Third-degree Price Discrimination In which market will the monopolist cause the higher price?

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Third-degree Price Discrimination In which market will the monopolist cause the higher price? Recall that

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Third-degree Price Discrimination In which market will the monopolist cause the higher price? Recall that But,

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Third-degree Price Discrimination

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Third-degree Price Discrimination

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Third-degree Price Discrimination

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Third-degree Price Discrimination

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No Sales to Smaller Market Even if third-degree price discrimination is possible, it may not be feasible to try to sell to both groups It is possible that the demand for one group is so low that it would not be profitable to lower price enough to sell to that group

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No Sales to Smaller Market

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The Economics of Coupons and Rebates Those consumers who are more price elastic will tend to use the coupon/rebate more often when they purchase the product than those consumers with a less elastic demand Coupons and rebate programs allow firms to price discriminate

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The Economics of Coupons and Rebates About 20 – 30% of consumers use coupons or rebates Firms can get those with higher elasticities of demand to purchase the good who would not normally buy it Table 11.1 shows how elasticities of demand vary for coupon/rebate users and non-users

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Price Elasticities of Demand: Users vs. Nonusers of Coupons

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Airline Fares Differences in elasticities imply that some customers will pay a higher fare than others Business travelers have few choices and their demand is less elastic Casual travelers and families are more price-sensitive and will therefore be choosier

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Elasticities of Demand for Air Travel

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Airline Fares There are multiple fares for every route flown by airlines They separate the market by setting various restrictions on the tickets Must stay over a Saturday night 21-day advance, 14-day advance Basic restrictions – can change ticket to only certain days Most expensive: no restrictions – first class

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Other Types of Price Discrimination Intertemporal Price Discrimination Practice of separating consumers with different demand functions into different groups by charging different prices at different points in time Initial release of a product, the demand is inelastic Hard back vs. paperback book New release movie Technology

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Intertemporal Price Discrimination Once this market has yielded a maximum profit, firms lower the price to appeal to a general market with a more elastic demand This can be seen graphically looking at two different groups of consumers – one willing to buy right now and one willing to wait

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Intertemporal Price Discrimination

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Other Types of Price Discrimination Peak-Load Pricing Practice of charging higher prices during peak periods when capacity constraints cause marginal costs to be higher Demand for some products may peak at particular times Rush hour traffic Electricity - late summer afternoons Ski resorts on weekends

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Peak-Load Pricing Objective is to increase efficiency by charging customers close to marginal cost Increased MR and MC would indicate a higher price Total surplus is higher because charging close to MC Can measure efficiency gain from peak-load pricing

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Peak-Load Pricing With third-degree price discrimination, the MR for all markets was equal MR is not equal for each market because one market does not impact the other market with peak-load pricing Price and sales in each market are independent Ex: electricity, movie theaters

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Peak-Load Pricing

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How to Price a Best-Selling Novel How would you arrive at the price for the initial release of the hardbound edition of a book? Hardback and paperback books are ways for the company to price discriminate How does the company determine what price to sell the hardback and paperback books for? How does the company determine when to release the paperback?

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How to Price a Best-Selling Novel Company must divide consumers into two groups: Those willing to buy the more expensive hardback Those willing to wait for the paperback Have to be strategic about when to release paperback after hardback Publishers typically wait 12 to 18 months

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How to Price a Best-Selling Novel Publishers must use estimates of past books to determine how much to sell a new book for Hard to determine the demand for a NEW book New books are typically sold for about the same price, to take this into account Demand for paperbacks is more elastic so we should expect it to be priced lower

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Two-Part Tariffs A two-part tariff is a lump-sum fee, p1, plus a price p2 for each unit of product purchased. Thus the cost of buying x units of product is p1 + p2x.

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Two-Part Tariffs Should a monopolist prefer a two-part tariff to uniform pricing, or to any of the price-discrimination schemes discussed so far? If so, how should the monopolist design its two-part tariff?

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Two-Part Tariffs p1 + p2x Q: What is the largest that p1 can be?

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Two-Part Tariffs p1 + p2x Q: What is the largest that p1 can be? A: p1 is the “market entrance fee” so the largest it can be is the surplus the buyer gains from entering the market. Set p1 = CS and now ask what should be p2?

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Two-Part Tariffs

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Two-Part Tariffs

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Two-Part Tariffs

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Two-Part Tariffs

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Two-Part Tariffs

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Two-Part Tariffs

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Two-Part Tariffs

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Two-Part Tariffs

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Two-Part Tariffs

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Two-Part Tariffs

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Two-Part Tariffs The monopolist maximizes its profit when using a two-part tariff by setting its per unit price p2 at marginal cost and setting its lump-sum fee p1 equal to Consumers’ Surplus.

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Two-Part Tariffs A profit-maximizing two-part tariff gives an efficient market outcome in which the monopolist obtains as profit the total of all gains-to-trade.

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The Two-Part Tariff Form of pricing in which consumers are charged both an entry and usage fee Ex: amusement park, golf course, telephone service A fee is charged upfront for right to use/buy the product An additional fee is charged for each unit the consumer wishes to consume Pay a fee to play golf and then pay another fee for each game you play

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The Two-Part Tariff Pricing decision is setting the entry fee (T) and the usage fee (P) Choosing the trade-off between free-entry and high-use prices or high-entry and zero-use prices Single Consumer Assume firm knows consumer demand Firm wants to capture as much consumer surplus as possible

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Two-Part Tariff with a Single Consumer

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Two-Part Tariff with Two Consumers Two consumers, but firm can only set one entry fee and one usage fee Does it make sense to set usage fee equal to MC and entrance fee equal to CS of the consumer with the smaller demand?

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Two-Part Tariff with Two Consumers

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Two-Part Tariff with Two Consumers Firm should set usage fee above MC Set entry fee equal to remaining consumer surplus of consumer with smaller demand Firm needs to know demand curves

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The Two-Part Tariff with Many Consumers No exact way to determine P* and T* Must consider the trade-off between the entry fee T* and the use fee P* Low entry fee: more entrants and more profit from sales of item As entry fee becomes smaller, number of entrants is larger and profit from entry fee will fall

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The Two-Part Tariff with Many Consumers To find optimum combination, choose several combinations of P and T Find combination that maximizes profit Firm’s profit is divided into two components Each is a function of entry fee, T assuming a fixed sales price, P

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Two-Part Tariff with Many Different Consumers

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The Two-Part Tariff Rule of Thumb Similar demand: Choose P close to MC and high T Dissimilar demand: Choose high P and low T Ex: Disneyland in California and Disney world in Florida have a strategy of high entry fee and charge nothing for ride

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The Two-Part Tariff With a Twist Entry price (T) entitles the buyer to a certain number of free units Gillette razors sold with several blades Amusement park admission comes with some tokens On-line fees with free time Can set higher entry fee without losing many consumers Higher entry fee captures either surplus without driving them out of the market Captures more surplus of large customers

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Polaroid Cameras In 1971, Polaroid introduced the SX-70 camera Polaroid was able to use two-part tariff for pricing of camera/film Allowed them greater profits than would have been possible if camera used ordinary film Polaroid had a monopoly on cameras and film

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Polaroid Cameras Buying camera is like entry fee Unlike an amusement park, for example, the marginal cost of providing an additional camera is significantly greater than zero It was necessary for Polaroid to have monopoly If ordinary film could be used, the price of film would be close to MC Polaroid needed to gain most of its profits from sale of film

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Polaroid Cameras Analytical framework:

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Polaroid Cameras In the end, the film prices were significantly above marginal cost There was considerable heterogeneity of consumer demands

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Bundling Bundling is packaging two or more products to gain a pricing advantage Conditions necessary for bundling Heterogeneous customers Price discrimination is not possible Demands must be negatively correlated

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Bundling When film company leased “Gone with the Wind,” it required theaters to also lease “Getting Gertie’s Garter” Why would a company do this? Company must be able to increase revenue We can see the reservation prices for each theater and movie

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Bundling Renting the movies separately would result in each theater paying the lowest reservation price for each movie: Maximum price Wind = $10,000 Maximum price Gertie = $3,000 Total Revenue = $26,000

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Bundling If the movies are bundled: Theater A will pay $15,000 for both Theater B will pay $14,000 for both If each were charged the lower of the two prices, total revenue will be $28,000 The movie company will gain more revenue ($2000) by bundling the movie

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Relative Valuations More profitable to bundle because relative valuation of two films are reversed Demands are negatively correlated A pays more for Wind ($12,000) than B ($10,000) B pays more for Gertie ($4,000) than A ($3,000)

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Relative Valuations If the demands were positively correlated (Theater A would pay more for both films as shown) bundling would not result in an increase in revenue

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Bundling If the movies are bundled: Theater A will pay $16,000 for both Theater B will pay $13,000 for both If each were charged the lower of the two prices, total revenue will be $26,000, the same as by selling the films separately

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Bundling Bundling Scenario: Two different goods and many consumers Many consumers with different reservation price combinations for two goods Can show graphically the preferences of consumers in terms of reservation prices and consumption decisions given prices charged r1 is reservation price of consumer for good 1 r2 is reservation price of consumer for good 2

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Reservation Prices

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Consumption Decisions When Products are Sold Separately

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Consumption Decisions When Products are Bundled

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Consumption Decisions When Products are Bundled The effectiveness of bundling depends upon the degree of negative correlation between the two demands Best when consumers who have high reservation price for Good 1 have a low reservation price for Good 2 and vice versa Can see graphically looking at positively and negatively correlated prices

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Reservation Prices

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Reservation Prices

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Movie Example

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Mixed Bundling Practice of selling two or more goods both as a package and individually This differs from pure bundling when products are sold only as a package Mixed bundling is good strategy when Demands are somewhat negatively correlated Marginal production costs are significant

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Mixed Versus Pure Bundling

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Mixed Bundling – Example Demands are perfectly negatively correlated but significant marginal costs Four customers under three different strategies Selling good separately, P1 = $50, P2 = $90 Selling goods only as a bundle, PB = $100 Mixed bundling: Sold individually with P1 = P2 = $89.95 Sold as a bundle with PB = $100

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Mixed Bundling – Example We can see the effects under different scenarios in the following table:

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Bundling If MC is zero, mixed bundling can still be more profitable if consumer demands are not perfectly negatively correlated Example: Reservation prices for consumers B and C are higher Compare the same three strategies Mixed bundling is the more profitable option since everyone will end up buying

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Mixed Bundling with Zero Marginal Costs

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Bundling in Practice Car purchasing Bundles of options such as electric locks with air conditioning Vacation Travel Bundling hotel with air fare Cable television Premium channels bundled together

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Bundling Mixed Bundling in Practice Use of market surveys to determine reservation prices Design a pricing strategy from the survey results Can show graphically using information collected from consumers Consumers are separated into four regions Can change prices to find max profits

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Mixed Bundling in Practice

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A Restaurant’s Pricing Problem

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Tying The practice of requiring a customer to purchase one good in order to purchase another Xerox machines and the paper IBM mainframe and computer cards Allows firm to meter demand and practice price discrimination more effectively

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Tying Allows the seller to meter the customer and use a two-part tariff to discriminate against the heavy user McDonald’s Allows them to protect their brand name Microsoft Uses to extend market power

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Versioning Extreme example: damaged goods Intel 486 486SX - $333 in 1991 486DX - $588 in 1991 IBM LaserPrinter E (5 pages per minute) LaserPrinter (10 pages per minute)

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Durable-goods pricing Waiting for the price cut. Non-price discrimination seems to increase profits Possible solutions: lowest price guarantee leasing instead of selling

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Advertising Firms with market power have to decide how much to advertise We can show how firms choose profit maximizing advertising Decision depends on characteristics of demand for firm’s product

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Advertising Assumptions Firm sets only one price for product Firm knows quantity demanded depends on price and advertising expenditure dollars, A Q(P,A) We can show the firm’s cost curves, revenue curves, and profits under advertising and no advertising

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ADVERTISING

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Advertising A Rule of Thumb for Advertising To maximize profit, the firm’s advertising-to-sales ratio should be equal to minus the ratio of the advertising and price elasticities of demand

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Advertising An Example R(Q) = $1 million/yr $10,000 budget for A (advertising--1% of revenues) EA = .2 (increase budget $20,000, sales increase by 20%) EP = -4 (markup price over MC is substantial)

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Advertising The firm in our example should increase advertising A/PQ = -(2/-.4) = 5% Increase budget to $50,000

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Advertising – In Practice Estimate the level of advertising for each of the firms Supermarkets EP = -10; EA = 0.1 to 0.3 Convenience stores EP = -5; EA very small Designer jeans EP = -3 to –4; EA = 0.3 to 1 Laundry detergents EP = -3 to –4; EA very large


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