Economics 103 Lecture # 15 Price Searching Continued.

Economics 103Lecture # 15

Price Searching

Continued.

The price searching model has one interesting twist to it.

At P*, Q* there is a DWL.

Why?

Why would a firm or customers allow money to sit on the table?

There is something wrong here, this can’t be an equilibrium.

When we assume the firm can only charge one price, we are forcing it to act in a straight jacket.

But why would a firm have to charge one price?

Price Discrimination

In an effort to capture the lost gains from trade, a price searching firm may try charging different customers different prices.

Let’s go back to our table of prices and ask what would happen if the firm didn’t have to lower the price to everyone.

When a firm can charge more than one price (and assuming the marginal cost of each sale is the same) then we have what is called price discrimination.

When the firm charges a different price for every single unit sold, we have what is called Perfect Price Discrimination.

Notice now the optimal quantity is produced.

What is the consumer’s surplus?

What price is charged?

What would be a problem in carrying out Perfect Price Discrimination?

This is a problem with all types of price discrimination.

It is very hard to think up examples of perfect price discrimination.

I think the only real possibility is:

A much more common type of price discrimination is Multi-Part Pricing.

What are some examples of this type of pricing?

The third type of price discrimination is called Ordinary Price Discrimination

Here you separate the market by elasticity, and then charge more to those with the lower elasticity.

You should be able to think up lots of examples of this type of pricing.

Vs.

Some people have to have things right away.

You know him better as …

Granted, it was the worlds greatest Kung Fu movie.

With all types of price discrimination the firm requires some type of information, and must police resale.

What metal is used to make

Why do Aluminum pots and pans look like this:

Interestingly, Price Discrimination is illegal (if the firm is a “monopoly”)

In order to be price discrimination the following must be true:

That is, the percentage mark-up should be the same.

This makes it very hard to prosecute pd, because Marginal Costs are hard to observe.

Would any of the following be considered Price Discrimination?

1. Women pay less when they shop on the web.

2. Women pay more for annuities.

3. My bank always gives me a worse rate than people off the street.

4. 92 vs. 87 Octane. Sometimes a 5 cent/liter difference.-some cars are locked in.

5. Pay more for salad bar if you don’t have a meal.

6. Pay less for airline ticket if you stay over a Saturday.

7. Better students pay less tuition through scholarships.

8. Buses and movies charge less for seniors.

Price discrimination is only one way to capture the gains from trade left over from charging just one price.

Consider the tactics of the greatest monopolist of all time.

.

Very smart mouse.

The fee Mickey charges, depends on the price per ride. The higher the price, the lower the fee.

What would be the optimal fee and price to charge?

.

-

-

Mickey’s pricing strategy (Two Part Pricing), leads to a famous puzzle.

Why is

So expensive at the

By charging so much for popcorn, you reduce the amount you can charge at the door, and create a DWL

Why do you think this is done?

- reflects the MC of cleaning

-the theatre has to share the gait revenue, but not the popcorn sales.

Why wouldn’t all firms price this way?

Seems like limited info needed, no worry about resale.

The problem you need a homogeneous clientele.

Another form of pricing is called Tie-In Sales

If you want to buy a razor blade it comes

The most famous Law and Economics Anti-trust legal case was over.

IBM sold

Inside they used

Suppose IBM has a monopoly over the machine, but the cards sell for nothing in the market.

What should IBM do about the price of the machine?

Many firms have been sued for Tie-In sales.

One last method of exploiting the gains from trade in price searching is All-Or-Nothing Pricing.

Here you charge someone their Average Value, rather than Marginal Value, and you give them a take it or leave it choice.

What is consumer surplus now?

This sort of pricing comes up all the time in personal relations.

What happens to my demand over time?

What happens?

With children the exact opposite sort of thing happens.