Pricing Tactics: TWo-part Tariff and Peak-Load Pricing Chapter 13. Menu pricing Organization: Markets and strategies ② Wen cao
Slides Reference: Industrial Organization: Markets and Strategies © Wen Cao Pricing Tactics : Two-part Tariff and Peak-Load Pricing Chapter 13. Menu pricing
Chapter 13-Objectives Chapter 13. Learning objectives Be able to make a clear difference between two part tariff, menu pricing and peak-load pricing Understand how a monopolist sets above prices and under which conditions such pricing strategies lead to higher profits than uniform prIcing
© Wen Cao 2 Chapter 13 - Objectives Chapter 13. Learning objectives • Be able to make a clear difference between twopart tariff, menu pricing and peak-load pricing. • Understand how a monopolist sets above prices and under which conditions such pricing strategies lead to higher profits than uniform pricing. Chapter 13. Learning objectives • Be able to make a clear difference between twopart tariff, menu pricing and peak-load pricing. • Understand how a monopolist sets above prices and under which conditions such pricing strategies lead to higher profits than uniform pricing
Chapter 13- Two-Part Tariff Two-part Tariff vs Uniform Pricing ° Uniform Pricing All consumers pay same price A monopoly how to set price, given demand p=a-bg Can monopoly gain higher profit? TWO-part Tariff Price include fixed part+variable part(depends on g Real-life example Why firm uses two-part tariff? How to implement two-part tariff? e Wen Cao
Chapter 13 – Two-Part Tariff © Wen Cao 3 Two-part Tariff vs Uniform Pricing • Uniform Pricing • All consumers pay same price • A monopoly how to set price, given demand p=a-bq • Can monopoly gain higher profit? • Two-part Tariff • Price include fixed part+variable part (depends on q) • Real-life example • Why firm uses two-part tariff? • How to implement two-part tariff?
Chapter 13- Two-Part Tariff TwO-part Tariff °Two- part Tariff Consumer utility: Usm+2VQ Budget constraint:m+++p?sI r-φ-p+2y (133) Derived demand: p=vQi i.e. Q= (134) Firm's uniform pricing: K, capacity constraint (13) andq1=K, and hence x=√R Firm charges fixed fee only wr(引)=φs.r-φ+2R≥I=U (136) 丌2≡x(=如,P=0=2k>R=r(φ=0,P=1/√R)=n
Chapter 13 – Two-Part Tariff Two-part Tariff • Two-part Tariff • Consumer utility: • Budget constraint: • • Derived demand: • Firm’s uniform pricing: K, capacity constraint • Firm charges fixed fee only: © Wen Cao 4
Chapter 13- Two-Part Tariff TWo-part Tariff vs Uniform Pricing lope =-Pi U1 E Q e Wen cao
Chapter 13 – Two-Part Tariff © Wen Cao 5 Two-part Tariff vs Uniform Pricing • •
Chapter 13- Price Discrimination and Menu Pricing Menu vs group pricing Group(and personalized) pricing Seller can infer consumers' willingness to pay from observable and verifiable characteristic (e.g., age) Menu pricing Willingness to pay private information e Seller must bring consumer to reveal this information How? Identify product dimension valued differently by consumers Design several versions of the product along that dimension Price versions to induce consumers' self-selection >Menu pricing(a.k.a. versioning, 2nd-degree price discrimination, nonlinear pricing) >Screening problem: uninformed party brings informed parties to reveal their private information e Wen Cao
© Wen Cao 6 Menu vs. group pricing • Group (and personalized) pricing • Seller can infer consumers’ willingness to pay from observable and verifiable characteristic (e.g., age) • Menu pricing • Willingness to pay = private information • Seller must bring consumer to reveal this information. • How? • Identify product dimension valued differently by consumers • Design several versions of the product along that dimension • Price versions to induce consumers’ self-selection Menu pricing (a.k.a. versioning, 2nd-degree price discrimination, nonlinear pricing) Screening problem: uninformed party brings informed parties to reveal their private information Chapter 13 – Price Discrimination and Menu Pricing
Chapter 13-Examples of menu pricing Case. Menu pricing in the information economy e Versioning based on quality Nagware: software distributed freely but displaying ads or screen encouraging users to buy full version >annoyance =discriminating device Versioning based on time Books: first in hardcover, later in paperback e Movies: first in theaters, next on DVD, finally on TV >price decreases as delay increases Versioning based on quantity Software site licenses Newspaper subscription → quantity discounts e Wen Cao
© Wen Cao 7 Case. Menu pricing in the information economy • Versioning based on quality •‘Nagware’: software distributed freely but displaying ads or screen encouraging users to buy full version annoyance = discriminating device • Versioning based on time • Books: first in hardcover, later in paperback • Movies: first in theaters, next on DVD, finally on TV. price decreases as delay increases • Versioning based on quantity • Software site licenses • Newspaper subscription quantity discounts Case. Menu pricing in the information economy • Versioning based on quality •‘Nagware’: software distributed freely but displaying ads or screen encouraging users to buy full version annoyance = discriminating device • Versioning based on time • Books: first in hardcover, later in paperback • Movies: first in theaters, next on DVD, finally on TV. price decreases as delay increases • Versioning based on quantity • Software site licenses • Newspaper subscription quantity discounts Chapter 13 - Examples of menu pricing
Chapter 13- Monopoly Menu Pricing Monopoly menu pricing Quantity-dependent prices(same product) e Suppose 2 types of consumers household, pH= 12-2qH business, Pb= 6-g B/2 Monopoly price decision for two markets MR(Q)=MC(Q,+ Q0)=MR(Qo=0 pH=6, gH=3 and pB=3, 9B=6 prot=3*6+63-0=36 Difficulty of implementing this pricing strategy price comparison, purchase in different market arbitrage, anti-trust law
© Wen Cao 8 Monopoly menu pricing • Quantity-dependent prices (same product) • Suppose 2 types of consumers • ‘household’, pH = 12-2qH • ‘business’, PB = 6-qB/2 • Monopoly price decision for two markets: MRH(QH) = MC(QH + QB) = MRB(QB) = 0 pH = 6, qH = 3 and pB = 3, qB = 6 profit=3*6+6*3-0=36 • Difficulty of implementing this pricing strategy: price comparison, purchase in different market, arbitrage, anti-trust law Chapter 13 – Monopoly Menu Pricing
Chapter 13-Monopoly Menu Pricing Monopoly menu pricing (Household) p(cents) MRH CSH(6)=(6*3)/2=9=CSB(3) e regular rate program: P=6 quantity discount program: P=3, for q>=9.(package price of 27. include 9 phone calls, after that p=3/each) CSH(discount)=126/2-39=(in different) CSB( discount)=(6-1.5)*9/2+1.5*9-39=675>0(but36 e Wen Cao
© Wen Cao 9 Monopoly menu pricing • • CSH(6)=(6*3)/2=9=CSB(3) • regular rate program: P=6 quantity discount program: P=3, for q>=9. (package price of 27, include 9 phone calls, after that p=3/each) • CSH(discount)=12*6/2-3*9=9(in different) CSB(discount)=(6-1.5)*9/2+1.5*9-3*9=6.75>0 (but 36 Chapter 13 – Monopoly Menu Pricing
Chapter 13- Monopoly Menu Pricing Monopoly menu pricing (cont'd Quality-dependent prices: a numerical example e Monopolist produces software in 2 versions Basic version and Pro version(higher quality, with advanced computing functionalities); cbasic =pro=0 120 potential consumers 02 universities(high type) and 120-n businesses(low type Willingness to pay Universities Businesses ro 9 Basic 32 Single-crossing: U(02, S2)-U(02, S1=4>0(0,S2)-U(0,S,) e Wen Cao
© Wen Cao 10 Monopoly menu pricing (cont’d) • Quality-dependent prices: a numerical example • Monopolist produces software in 2 versions: • Basic version and Pro version (higher quality, with advanced computing functionalities); cbasic cpro • 120 potential consumers universities (high type) and businesses (low type) • Willingness to pay: • Single-crossing: U(, s) U(, s) = 4 U(, s) U(, s) =1 Chapter 13 – Monopoly Menu Pricing Universities Businesses Pro 9 3 Basic 5 2