ECON 308 Product Pricing with Monopoly Power Chapter

ECON 308 Product Pricing with Monopoly Power Chapter 7 October 1 st – 6 th , 2009

Price Discrimination • Charging different prices for different units sold. • Allows firms to increase sales and capture more of consumer surplus.

Monopoly Pricing: Single Price $ Price Demand Pm Potential Efficiency loss Marginal Cost MR Qm Qty/T

First Degree: Charging different customers different prices. • Auction • College scholarships

First Degree: Different Prices for different Degree buyers $ Price Demand Scholarship Amount Tuition Marginal Cost MR Qm Qty/T

First Degree: Charging different customers different prices. • • Auction College scholarships IBM Punch Cards Polariod Camera, Film Ink Jet Printers, Cartridges Swiffer, pads Glllette Razor, Blades

Second Degree: (Quantity Forcing) • Offering a schedule of prices to all buyers, which successively lowers the price for additional units, purchased (Moving down each buyers individual demand) • Tires: Buy 3, get 4 th free. • Soft Drinks: Product prices, – medium 16 oz. $ 1. 09, . 07/oz. – large: 22 oz. $ 1. 19, extra 6 oz. @. 02/oz. – extra large: 32 oz. $1. 29, extra 10 oz. @. 01/ oz. • Two Part Tariff: Entry Fee plus per unit – Costco: Membership & Price

Third Degree: Charging different prices to different groups according to different elasticity of Demand. • • • Grocery coupons Prescription drugs in different countries. Doctors medical services Newly released unique products Movies: Children, Seniors, Middle; Matinee Mail Order Catalogues: Old vs. New Customer Freeway Adjacent Restaurant Brand name mixers on Holiday Sale Mattresses: Match any advertised price Menu

Necessary Conditions for Successful Price Discrimination • Ability to identify and separate buyers by elasticity of demand. • Collect different prices from the different buyers • Prevent Resale