Chapter 11 Pricing with Market Power
Chapter 11 Pricing with Market Power
Topics to be Discussed a Capturing Consumer Surplus ■ Price Discrimination a Intertemporal Price Discrimination and Peak-Load Pricing Chapter 1 Slide 2
Chapter 11 Slide 2 Topics to be Discussed ◼ Capturing Consumer Surplus ◼ Price Discrimination ◼ Intertemporal Price Discrimination and Peak-Load Pricing
Topics to be Discussed ■ The Two- Part tariff Bundling a Advertising Chapter 11 Slide 3
Chapter 11 Slide 3 Topics to be Discussed ◼ The Two-Part Tariff ◼ Bundling ◼ Advertising
Introduction a Pricing without market power(perfect competition) is determined by market supply and demand a The individual producer must be able to forecast the market and then concentrate on managing production (cost) to maximize profits Chapter 1 Slide 4
Chapter 11 Slide 4 Introduction ◼ Pricing without market power (perfect competition) is determined by market supply and demand. ◼ The individual producer must be able to forecast the market and then concentrate on managing production (cost) to maximize profits
Introduction a Pricing with market power(imperfect competition requires the individual producer to know much more about the characteristics of demand as well as manage production Chapter 11 Slide 5
Chapter 11 Slide 5 Introduction ◼ Pricing with market power (imperfect competition) requires the individual producer to know much more about the characteristics of demand as well as manage production
Capturing Consumer Surplus Between O and Q* consumers $/Q P will pay more than max A P*-consumersurplus(A) Pc is the price that would exist in a perfectly competitive market 2 MC If price is raised above the firm will lose sales and reduce profit D Beyond Q’, price will have to fall to create a consumersurplus(B) MR Quantity Chapter 1 Slide 6
Chapter 11 Slide 6 Capturing Consumer Surplus Quantity $/Q D MR Pmax MC If price is raised above P*, the firm will lose sales and reduce profit. PC PC is the price that would exist in a perfectly competitive market. A P* Q* P1 Between 0 and Q*, consumers will pay more than P*--consumer surplus (A). B P2 Beyond Q*, price will have to fall to create a consumer surplus (B)
Capturing Consumer Surplus S/Q 1a .P*Q" single P&Q@ MC=MR P .A: consumer surplus with P .B: P>MC consumer would buy B at a lower price P Pi: less sales and profits P2: increase sales and reduce MC revenue and profits .Pc: competitive price D MR Quantity Chapter 11 Slide 7
Chapter 11 Slide 7 Capturing Consumer Surplus •P*Q*: single P & Q @ MC=MR •A: consumer surplus with P* •B: P>MC & consumer would buy at a lower price •P1 : less sales and profits •P2 : increase sales & and reduce revenue and profits •PC: competitive price Quantity $/Q D MR Pmax MC PC A P* Q* P1 B P2
Capturing Consumer Surplus Question S/Q p max A How can the firm capture the consumer surplus in A and sell profitably in B? Answer 2 Price discrimination MC TWO-part tariffs Bundling D MR Quantity Chapter 1 Slide 8
Chapter 11 Slide 8 Capturing Consumer Surplus Quantity $/Q D MR Pmax MC PC A P* Q* P1 B P2 Question How can the firm capture the consumer surplus in A and sell profitably in B? Answer Price discrimination Two-part tariffs Bundling
Capturing Consumer Surplus a Price discrimination is the charging of different prices to different consumers for similar goods Chapter 11 Slide 9
Chapter 11 Slide 9 Capturing Consumer Surplus ◼ Price discrimination is the charging of different prices to different consumers for similar goods
Price discrimination a First Degree Price Discrimination Charge a separate price to each customer the maximum or reservation price they are willing to pay. Chapter 11 Slide 10
Chapter 11 Slide 10 Price Discrimination ◼ First Degree Price Discrimination ⚫ Charge a separate price to each customer: the maximum or reservation price they are willing to pay
