Essay on Ch 10 Pricing with Market Power

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Ch 10 Pricing with Market Power

10.1 Conditions for Price Discrimination

Why price discrimination pays?
Price discrimination can extract additional CS from consumers.
Who can price discriminate?
1. Have market power
2. Identify how consumers differ
3. Prevent or limit resale

Prevent Resale
Raise transaction costs and government tariffs

Not all price differences are price discrimination: Price discrimination is based on charging different prices for units of a good that cost the same to produce.

Types of price discrimination
Perfect price discrimination (first-degree price discrimination): the firm sells each unit at the maximum amount any customer is willing to pay.
Quantity-based price discrimination (second-degree price discrimination): a firm charges a different price for large purchases than for small quantities so that the price paid varies according t the quantity purchased.
Multi-group price discrimination (third-degree price discrimination): the firm charges groups of customers different prices, but it does not charge different prices within the group.

10.2 Perfect Price Discrimination
How a firm perfectly price discriminates?
The firm’s MR is its demand curve if it can perfectly price discriminate.

Perfect price discrimination is efficient: it maximizes the sum of CS and PS, but harms some consumers.
Individual Price Discrimination: a firm charges individual-specific prices to different consumers, which may or may not exactly equal consumers’ reservation prices.

10.3 Multi-group Price Discrimination if price discrimination is allowed,
MR1=MC, MR2=MC total profit= if price discrimination is not allowed,
Q=Q1+Q2 then find MR according to total demand, and MR=MC find profit.
If the two firms have same MR, then we can find the ratio of prices to therefore find demand elasticity in two firms.

Identify Groups
Observable characteristics of consumers
Identify and divide consumers on the basis of their actions: the firm allows consumers to self-select the group to which they belong. (queues and time-intensive methods)

By spending extra time to obtain a discount, price sensitive consuers are able to differentiate themselves from others. E.g. coupon, airline tickets, reverse auctions, and rebates.

Effects of Multi-group Price Discrimination

Multi-group Price Discrimination vs. competition
CS is greater and more output is produced with perfect competition than with multi-group price discrimination.

Multi-group Price Discrimination vs. Single-price monopoly
Unless a firm using multi-group price discrimination sells significantly more output than it would if it had to set a single price, total surplus is likely to be lower with price discrimination.

10.4 Quantity-based Price Discrimination
Block-pricing schedules: charging one price for the first few units (a block) of usage and a different price for subsequent blocks. (declining or increasing)

The more block prices that the firm can set, the closer the firm can get to perfect price discrimination.

10.5 Two-Part Pricing
The firm charges each consumer a lump-sum access fee for the right to buy as many units of the good as the consumer wants at a specified price. Overall payment=access fee+ per-unit fee

Identical Consumers
Total Q=Q1+Q2+…+Qn
MR=MC set a two-part price as
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