Bài giảng Managerial Economics - Chapter 014: Advanced Pricing Techniques

Chapter 14: Advanced Pricing TechniquesMcGraw-Hill/IrwinCopyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.Advanced Pricing TechniquesPrice discriminationMultiple productsCost-plus pricingCapturing Consumer SurplusUniform pricingCharging the same price for every unit of the productPrice discriminationMore profitable alternative to uniform pricingMarket conditions must allow this practice to be profitably executedTechnique of charging different prices for the same productUsed to capture consumer surplus (turning consumer surplus into profit)The Trouble with Uniform Pricing (Figure 14.1)Price DiscriminationExists when the price-to-marginal cost ratio differs between two markets Three conditions necessary to practice price discrimination profitably:Firm must possess some degree of market powerA cost-effective means of preventing resale between lower- and higher-price buyers (consumer arbitrage) must be implementedPrice elasticities must differ between individual buyers or groups of buyersPrice DiscriminationFirst-Degree (Perfect) Price DiscriminationEvery unit is sold for the maximum price each consumer is willing to payAllows the firm to capture entire consumer surplusDifficultiesRequires precise knowledge about every buyer’s demand for the goodSeller must negotiate a different price for every unit sold to every buyerFirst-Degree (Perfect) Price Discrimination (Figure 14.2)Second-Degree Price DiscriminationLower prices are offered for larger quantities and buyers can self-select the price by choosing how much to buyWhen the same consumer buys more than one unit of a good or service at a time, the marginal value placed on additional units declines as more units are consumedExamples of Second Degree Price DiscriminationTwo-part pricingBlock pricing14-10Second-Degree Price DiscriminationTwo-part pricingCharges buyers a fixed access charge (A) to purchase as many units as they wish for a constant fee (f) per unitTotal expenditure (TE) for q units is:Average price declines as more is purchasedWhen consumers have identical demands, entire consumer surplus can be captured by:Setting f *= MCSetting A* = consumer surplus (CS)Optimal usage fee when two groups of buyers have identical demands is the level for which MRf = MCfSecond-Degree Price DiscriminationInverse Demand Curve for Each of 100 Identical Senior Golfers (Figure 14.3)Summary of Two Part PricingConsumers will purchase product until marginal benefit = unit priceUnit price will at least cover marginal costWith consumers with different preferences unit price will be above marginal costConsumers will choose to purchase as long as consumer surplus given unit price is greater than lump-sum fee (right to purchase)With identical preferences monopolist will capture the entire consumer surplusWith different preferences some consumers will retain part of their consumer surplus14-14Demand at Northvale Golf Club (Figure 14.4)Declining block pricingOffers quantity discounts over successive discrete blocks of quantities purchasedSecond-Degree Price DiscriminationBlock Pricing with Five Blocks (Figure 14.5)Compare unit price of an additional block to MCThird-Degree Price DiscriminationIf a firm sells in two markets, 1 & 2Allocate output (sales) so MR1 = MR2Optimal total output is that for which MRT = MCFor profit-maximization, allocate sales of total output so that MRT = MC = MR1 = MR2Equal-marginal-revenue principleAllocating output (sales) so MR1 = MR2 which will maximize total revenue for the firm (TR1 + TR2)More elastic market gets lower priceLess elastic market gets higher priceIF MR1 ≠ MR2 then shifting a unit of sales from the lower marginal revenue market to the higher marginal revenue market will increase revenue and leave total cost unchanged.Third-Degree Price DiscriminationAllocating Sales Between Markets (Figure 14.6)Constructing the Marginal Revenue Curve (Figure 14.7)Horizontally sum MR curvesProfit-Maximization Under Third-Degree Price Discrimination (Figure 14.8)Third degree price discriminationExample of third degree price discriminationBigsoft sells software to students and commercial usersIt prices the software at $100 for commercial users and $50 to students. Commercial users have a price elasticity of demand of -1.5 and students have a price elasticity of demand of -4 at the current prices.Is the firm practicing optimal third degree price discrimination?Bigsoft exampleMR = P(1+1/E)Commercial usersMR= $100(1-1/1.5) =$100 (1-.67)= $33Student users MR = $50 (1-1/4) = $37.5How much can Bigsoft increase revenues by shifting one sale?$37.5-33 = 4.5Bigsoft exampleSuppose we have constant price elasticities of demand and constant marginal costEc = -1.5Es = -4MC = $40What are optimal prices?Bigsoft exampleMRc = MRs = MCMRc = $40, MRs = $40Given that MR = P(1+1/E) then P = MR/(1+1/E)Pc = $120 and Ps = $53.33Multiple ProductsRelated in consumptionFor two products, X & Y, produce & sell levels of output for which MRX = MCX and MRY = MCY MRX is a function not only of QX but also of QY (as is MRY) – conditions must be satisfied simultaneouslyExample: Disney sells DVD and complementary toysDisney studiosDisney is considering lowering the price of its latest DVD from $20 to $15. This will increase unit sales but lower profits from the sale of the DVD’s by $10 million. Increased sales of the DVDs will produce more sales of action figures. If the profit margin on an action figure is $5, how many more action figures must Disney sell to offset the decline in profits on the DVDs?Answer ($10 million/$5) = 2 million14-29Multiple ProductsRelated in production as substitutesFor two products, X & Y, allocate production facility so that MRPX = MRPYOptimal level of facility usage in the long run is where MRPT = MCFor profit-maximization: MRPT = MC = MRPX = MRPYJBL PlasticsJBL has a vacuum press that can produce plastic cars or tanks.The marginal cost of producing two cars or one tank is $5.The marginal revenue from the sale of a toy car is $3 and the price is $6. The marginal revenue from the sale of a toy tank is $7 and the price is $14.MRPc from toy cars is $3x2= $6MRPt from toy tanks is $7x1=$7Should JBL readjust the ratio of cars to tanks it is producing so thatMRPt= MRPc= MC14-3114-32Profit-Maximizing Allocation of Production Facilities (Figure 14.9)Horizontally sum MRP curves14-33Multiple ProductsRelated in production as complementsTo maximize profit, set joint marginal revenue equal to marginal cost: MRJ = MCIf profit-maximizing level of joint production exceeds output where MRJ kinks, units beyond zero MR are disposed of rather than soldProfit-maximizing prices are found using demand functions for the two goods14-34Profit-Maximization with Joint Products (Figure 14.11)Vertically sum MR curvesFarmer JonesThe marginal revenue from another cow brought to market includes marginal revenue of $300 from the sale of beef at a price of $500 and a price of $50 and marginal revenue $25 from the sale of the hide.If the marginal cost of bringing another cow to market is $350, should he slaughter another cow?14-35Farmer JonesProductMarginal RevenueBeef$300Hide25Total MR$325Marginal Cost$350When price discrimination is not possible, bundling multiple goods and charging a single price can be more profitable than charging individual prices for multiple goodsTwo conditions for profitable bundlingConsumers must have different demand prices for each good in the bundleDemand prices must be negatively correlated across consumer typesBundling Multiple ProductsBundling of Tickets to Football GameMax TR =$3,300 = 2 x $1,400 + $500Max TR = $4,000 = 2 x $2,000Cost-Plus PricingCommon technique for pricing when firms do not wish to estimate demand & cost conditions to apply the MR = MC rule for profit-maximizationPrice charged represents a markup (margin) over average cost: P = (1 + m) ATC Where m is the markup on unit costDoes not generally produce profit-maximizing priceFails to incorporate information on demand & marginal revenueUses average, not marginal, costCost-Plus PricingPractical Problems with Cost-Plus Pricing (Figure 14.13)Manager assumes the firm can produce 5,000 units and sell at a 50 percent mark-upConsider Optimal Markup Over MC Relative to Price