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

image

image

third-degree price discrimination

dividing consumers into 2+ groups, charge different prices

creating consumer groups

  1. total output should be divided so that marginal revenue for each group is equal
  1. output should be divided so that MR=MC for each group

optimal price & quantity is chosen when MR1=MR2=MC

image

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

image

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

image

two-part tariff

consumers charged entry and usage fee

image

maximize profit-> usage fee= MC, entry fee= entire consumer surplus