21 terms

Managerial Economics Exam 2: Chapter 11


Terms in this set (...)

Pricing Strategies that Yield Greater Profits
-Extract surplus from consumers.

-For special cost and demand structures.

-In markets with intense price competition.
Models that Extract Surplus from Consumers
-Price discrimination (first, second and third degree)

-Two-part pricing

-Block pricing

-Commodity bundling
Price Discrimination
The practice of charging different prices to consumers for the same good, with same costs to achieve higher profits. One way to extract consumer surplus.
Three Basic Forms of
Price Discrimination
1. First-degree or perfect price discrimination.

2. Second-degree price discrimination.

3. Third-degree or segmented market price discrimination, a totally different animal.
First Degree Price Discrimination
Perfect Price Discrimination.

Practice of charging each consumer the maximum amount he or she will pay for each incremental unit of the good.

Permits a firm to extract all surplus from consumers.
Second Degree Price Discrimination
The practice of posting a discrete schedule of declining prices for different quantities.

Eliminates the information constraint present in first-degree price discrimination.

Doesn't capture all of the consumer surplus.

Example: "buy two for $8 and get the next two for $5!"
Third Degree Price Discrimination
Segmented Market Price Discrimination

The practice of charging different groups of consumers different prices for the same product.

Must be able to identify, separate, and prevent re-sale between different groups of consumers with different Elasticities of Demand

Examples include student discounts, senior citizen's discounts, airlines, and regional & international pricing.
Profit Max Rule
Produce and sell Q in each market so that MR1=MR2=MC.
Two Part Pricing
When it isn't feasible to charge different prices for different units sold, but demand information is known, _____ _____ ________ may permit you to extract some or all surplus from consumers.

Consists of a fixed fee (membership or initiation) and a per unit (monthly) charge.

-Athletic/country club memberships.
-Sam's Club and Cosco
How Two Part Pricing Works
1. Set unit price at marginal cost.

2. Compute consumer surplus at that price.

3. Charge a fixed-fee equal to consumer surplus.

4. Same result as perfect price discrimination.
Block Pricing
The practice of packaging multiple units of an identical product together and selling them as one package.

-Six-packs of soda
Commodity Bundling
The practice of bundling two or more different products together and charging one price for the bundle.

-Vacation packages
-Computers and monitors and/or software
Peak Load Pricing
A pricing strategy in which higher prices are charged during peak demand times/hours than during off-peak times/hours.
Cross Subsidies
Prices charged for one product are subsidized by the sale of another product.

May be profitable when there are significant demand complementarities and cost complementarities and/or economies of scope.

Example: Drinks and meals at restaurants
Double Marginalization
Upstream division is the sole provider of a key input.

Downstream division uses the input produced by the upstream division to produce the final output.

Both divisions mark price up over marginal cost resulting in __________ _____________ resulting in less than optimal overall profits for the firm.
Transer Pricing
Fixes double marginalization.

The internal price at which an upstream division sells inputs to a downstream division should be set in order to maximize the overall firm profits.
Price Matching
Advertising a price and a promise to match any lower price offered by a competitor.

No firm has an incentive to lower their prices.

Each firm charges the monopoly price and shares the market.
Induce Brand Loyalty
Some consumers will remain loyal to a firm, even in the face of price increases.

Advertising campaigns and frequent-user style programs can help firms induce loyalty among consumers.
Randomized Pricing
A strategy of constantly changing prices.

Decreases consumers' incentive to shop around as they cannot learn from experience which firm charges the lowest price.

Reduces the ability of rival firms to optimally undercut a firm's prices.
Extract ALL Consumer Surplus
First Degree Price Discrimination

Block Pricing

Two part pricing
Extract SOME Consumer Surplus
Commodity Bundling

Second Degree Price Discrimination

Third Degree Price Discrimination