Pricing

Price discrimination (non-uniform pricing) = charging diff prices for the same product depending on consumer characteristics or on quantity they buy. Reasons: Capture more consumer surplus Sell to more customers Conditions for price discrimination: Firm has market power. Consumers price elasticities differ, and firm can identify differences. Firm can prevent / limit resales: Services Transaction costs Firm acts to discourage resales Govt actions.

N.B. Price diffs based on cost diffs are not discrimination. 3 main types of price discrim: Perfect (first degree) price discrim: firm sells each unit for the max amount any customer is willing to pay for it; Quantity (second degree) discrim: firm charges diff price for large Qs than for small Qs; Multimarket (3rd degree) discrim: firm charges diff groups of customers diff prices.

Perfect price discrimination: Firm knows each customers reservation price & can capture max possible consumer surplus. Socially efficient because no deadweight loss (total W = W in perf comp, BUT no CS: just PS). Perfectly price discriminating monopoly: MR = DD; profit = p MC on each unit sold. Everyone pays a different price; only the last buyer pays price = MC; Ppd monopolist captures all the welfare. Efficient, but ppd redistributes income away from consumers to producers. Note: Welfare increases (relative to simple monopoly) as a result of ppd if and only if output increases. Dynamic pricing: vary prices frequently according to channel, product, customer & time.

Quantity discrimination: Individual DD slopes down, so vary price with Q bought to increase profit. Block pricing: firm charges one price for the first few units (block), and a diff price (lower or higher) for later units Profit is higher, W is higher (deadweight loss lower); CS is lower. More blocks closer to ppd (Capture more CS; reduce deadweight loss; higher total welfare.)

Multimarket price discrimination:

Sony sets diff ps in Japan & USA. Profit max for both markets: MRJapan = MC = MRUSA Ratio of prices depends on elasticities: MRJ = pJ (1 + 1/J); MRUSA = pUSA (1 + 1/USA) pJ pUSA = (1 + 1/USA) (1 + 1/J)

Dumping: charging a lower price in the foreign market than at home. Welfare effects of mmpd: Relative to perf comp: worse! (& worse than ppd) Relative to simple monopoly: cant say. Mmpd approaches ppd as no. of sub-markets increases (increasing total W), but introduces new sources of inefficiency.

Competitive, Single-price, & Perfect Discrimination Equilibria

Compare perf comp, single-price & perfect price discriminating monopoly: Compettv eqm: ec, Qc & pc. W maxd: CS = A+B+C, PS = D+E; p = MC. Single-price monopoly eqm: es, Qs & ps. CS = A; PS = B+D; deadweight loss = C+E. Perfectly price discriminating monopoly: MR = DD; profit = p MC on each unit sold. Eqm ec, pc and Qc. But (1) everyone pays a different price; only the last buyer pays price = MC; (2) ppd monopolist captures all the welfare. Efficient, but ppd redistributes income away from consumers to producers. Single price monopoly though inefficient leaves consumers as a group better off, as there is still some CS (area A) enjoyed by those consumers with higher reservation prices. Advertising: A monopoly advertises to raise its profit. A successful advertising campaign shifts the market demand curve by changing consumers tastes or informing them about new products. Even if advertising succeeds in shifting demand, it may not pay for the firm to advertise. If advertising shifts demand outward, the firms gross profit must rise. The firm undertakes this advertising campaign only if it expects its net profit (gross profit minus the cost of advertising) to increase.