Transcript
Copyright © 2008 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/IrwinManagerial Economics, 9e
Managerial Economics ThomasMauriceninth edition
Copyright © 2008 by the McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/IrwinManagerial Economics, 9e
Managerial Economics ThomasMauriceninth edition
Chapter 14
Advanced Pricing Techniques
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Advanced Pricing Techniques
• Price discrimination• Multiple products• Cost-plus pricing
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Capturing Consumer Surplus
• Uniform pricing• Charging the same price for every unit of
the product• Price discrimination
• More profitable alternative to uniform pricing
• Market conditions must allow this practice to be profitably executed
• Technique of charging different prices for the same product
• Used to capture consumer surplus (turning consumer surplus into profit)
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The Trouble with Uniform Pricing (Figure 14.1)
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Price Discrimination
• Exists when the price-to-marginal cost ratio differs between two products:
A B
A B
P P
MC MC
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Price Discrimination
Three conditions necessary to practice price discrimination profitably:
1) Firm must possess some degree of market power
2) A cost-effective means of preventing resale between lower- and higher-price buyers (consumer arbitrage) must be implemented
3) Price elasticities must differ between individual buyers or groups of buyers
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First-Degree (Perfect) Price Discrimination• Every unit is sold for the maximum
price each consumer is willing to pay• Allows the firm to capture entire
consumer surplus
• Difficulties• Requires precise knowledge about every
buyer’s demand for the good• Seller must negotiate a different price for
every unit sold to every buyer
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First-Degree (Perfect) Price Discrimination (Figure 14.2)
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Second-Degree Price Discrimination
• Lower prices are offered for larger quantities and buyers can self-select the price by choosing how much to buy
• When the same consumer buys more than one unit of a good or service at a time, the marginal value placed on additional units declines as more units are consumed
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Second-Degree Price Discrimination
• Two-part pricing• Charges buyers a fixed access charge (A) to
purchase as many units as they wish for a constant fee (f) per unit
• Total expenditure (TE) for q units is:
TE A fq
Af
q
TE A fqp
q q
Average price ( ) is:p
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Second-Degree Price Discrimination
• When consumers have identical demands, entire consumer surplus can be captured by:• Setting f = MC• Setting A = consumer surplus (CS)
• Optimal usage fee when two groups of buyers have identical demands is the level for which MRf = MCf
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Inverse Demand Curve for Each of 100 Identical Senior Golfers (Figure 14.3)
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Demand at Northvale Golf Club (Figure 14.4)
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Second-Degree Price Discrimination
• Declining block pricing• Offers quantity discounts over
successive discrete blocks of quantities purchased
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Block Pricing with Five Blocks (Figure 14.5)
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Third-Degree Price Discrimination
• If a firm sells in two markets, 1 & 2• Allocate output (sales) so MR1 = MR2
• Optimal total output is that for which MRT = MC
• For profit-maximization, allocate sales of total output so that MRT = MC = MR1 = MR2
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Third-Degree Price Discrimination
• Equal-marginal-revenue principle• Allocating output (sales) so MR1 =
MR2 which will maximize total revenue for the firm (TR1 + TR2)
• More elastic market gets lower price
• Less elastic market gets higher price
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Allocating Sales Between Markets (Figure 14.6)
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Constructing the Marginal Revenue Curve (Figure 14.7)
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Profit-Maximization Under Third-Degree Price Discrimination (Figure 14.8)
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Multiple Products
• Related in consumption• For two products, X & Y, produce &
sell levels of output for which
MRX = MCX and MRY = MCY
• MRX is a function not only of QX but
also of QY (as is MRY) -- conditions must be satisfied simultaneously
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Multiple Products
• Related in production as substitutes• For two products, X & Y, allocate
production facility so that
MRPX = MRPY
• Optimal level of facility usage in the long run is where MRPT = MC
• For profit-maximization:
MRPT = MC = MRPX = MRPY
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Multiple Products
• Related in production as complements• To maximize profit, set joint marginal
revenue equal to marginal cost:
MRJ = MC• If profit-maximizing level of joint
production exceeds output where MRJ kinks, units beyond zero MR are disposed of rather than sold
• Profit-maximizing prices are found using demand functions for the two goods
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Profit-Maximizing Allocation of Production Facilities (Figure 14.9)
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Profit-Maximization with Joint Products (Figure 14.11)
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Cost-Plus Pricing
• Common technique for pricing when firms do not wish to estimate demand & cost conditions to apply the MR = MC rule for profit-maximization
• Price charged represents a markup (margin) over average cost:
P = (1 + m)ATC Where m is the markup on unit cost
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Cost-Plus Pricing
• Does not generally produce profit-maximizing price• Fails to incorporate information on
demand & marginal revenue• Uses average, not marginal, cost
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Practical Problems with Cost-Plus Pricing (Figure 14.13)
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