Lecture171822106student.ppt

Lectures 17 and 18 Pricing Key issues why and how firms price discriminate perfect price discrimination quantity discrimination multimarket price discrimination two-part tariffs tie-in sales Applications and problems Broadway theaters Providian tries to perfectly price discriminate Amazon dynamic pricing Coca Cola: Japan U.S. smuggling drugs from Canada IBM requirement ties eBay auctions Nonuniform pricing prices vary across customers or units noncompetitive firms use nonuniform pricing to increase profits 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 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 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 Example Example  Broadway theaters increase their profits 5% by price discriminating rather than by setting uniform prices 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 2001: Bellagio Hotel, Las Vegas, charged art lovers $12 each to see Steve Martin’s art collection—Nevada residents paid only $6. Successful price discrimination requires that firm have market power consumers have different demand elasticities, and firm can identify how consumers diffe