CHAPTER ELEVEN- PRICING WITH MARKET POWER
Capturing consumer surplus
firms can charge only one price to all customers
ideally charge a higher price to customers willing to spend more
sell for lower prices to customers willing to pay lower prices
price discrimination
charging different prices to different customers for similar goods
first- degree discrimination
charging each customer their reservation price
reservation price
max price customer is willing to pay
profit expands
second-degree price discrimination
different prices per unit for different quantities of the same good
block pricing
different prices for different quantities
can make consumers better off- expanding output and lowering cost
third-degree price discrimination
dividing consumers into 2+ groups, charge different prices
creating consumer groups
- total output should be divided so that marginal revenue for each group is equal
- output should be divided so that MR=MC for each group
optimal price & quantity is chosen when MR1=MR2=MC
Intertemporal price discrimination and Peak-Load pricing
interemporal price discrimination- seperating consumers into different groups by charging different prices at different times
peak-load pricing- charging higher prices durking peak periods
initially high price- firm captures surplus from consumers who have high demand, later price is reduced to appeal to a larger market
demand for some good increases at certain times of the year- charge higher price during peak is more profitable than high price all the time
two-part tariff
consumers charged entry and usage fee
maximize profit-> usage fee= MC, entry fee= entire consumer surplus