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1、Chapter 11Pricing with Pricing with Market PowerMarket Power1Topics to be DiscussednCapturing Consumer SurplusnPrice DiscriminationnIntertemporal Price Discrimination and Peak-Load Pricing2Topics to be DiscussednThe Two-Part TariffnBundlingnAdvertising3IntroductionnPricing without market power(perfe
2、ct competition)is determined by market supply and demand.nThe individual producer must be able to forecast the market and then concentrate on managing production(cost)to maximize profits.4IntroductionnPricing with market power(imperfect competition)requires the individual producer to know much more
3、about the characteristics of demand as well as manage production.5Capturing Consumer SurplusQuantity$/QDMRPmaxMCIf price is raised above P*,the firm will lose sales and reduce profit.PCPC is the pricethat would exist ina perfectly competitivemarket.AP*Q*P1Between 0 and Q*,consumerswill pay more than
4、 P*-consumer surplus(A).BP2Beyond Q*,price willhave to fall to create a consumer surplus(B).6Capturing Consumer SurplusP*Q*:single P&Q MC=MRA:consumer surplus with P*B:PMC&consumer would buy at a lower priceP1:less sales and profitsP2:increase sales&and reduce revenue and profitsPC:competitive price
5、Quantity$/QDMRPmaxMCPCAP*Q*P1BP27Capturing Consumer SurplusQuantity$/QDMRPmaxMCPCAP*Q*P1BP2QuestionHow can the firmcapture the consumer surplusin A and sell profitably in B?AnswerPrice discriminationTwo-part tariffsBundling8Capturing Consumer SurplusnPrice discrimination is the charging of different
6、 prices to different consumers for similar goods.9Price DiscriminationnFirst Degree Price DiscriminationlCharge a separate price to each customer:the maximum or reservation price they are willing to pay.10P*Q*Without price discrimination,output is Q*and price is P*.Variable profit is the area betwee
7、n the MC&MR(yellow).Additional Profit From Perfect First-Degree Price DiscriminationQuantity$/QPmaxWith perfect discrimination,eachconsumer pays the maximumprice they are willing to pay.Consumer surplus is the area above P*and between0 and Q*output.D=ARMRMCOutput expands to Q*and pricefalls to PC wh
8、ere MC=MR=AR=D.Profits increase by the area above MCbetween old MR and D to outputQ*(purple)Q*PC11P*Q*Consumer surplus when a single price P*is charged.Variable profit when a single price P*is charged.Additional profit fromperfect price discriminationQuantity$/QPmaxD=ARMRMCQ*PCWith perfect discrimin
9、ation Each customer pays their reservation priceProfits increaseAdditional Profit From Perfect First-Degree Price Discrimination12nQuestionlWhy would a producer have difficulty in achieving first-degree price discrimination?nAnswer1)Too many customers(impractical)2)Could not estimate the reservation
10、 price for each customerAdditional Profit From Perfect First-Degree Price Discrimination13Price DiscriminationnFirst Degree Price DiscriminationlThe model does demonstrate the potential profit(incentive)of practicing price discrimination to some degree.14Price DiscriminationnFirst Degree Price Discr
11、iminationlExamples of imperfect price discrimination where the seller has the ability to segregate the market to some extent and charge different prices for the same product:uLawyers,doctors,accountantsuCar salesperson(15%profit margin)uColleges and universities15First-Degree PriceDiscrimination in
12、PracticeQuantityDMRMC$/QP2P3P*4P5P6P1Six prices exist resultingin higher profits.With a single priceP*4,there are few consumers andthose who pay P5 or P6 may have a surplus.Q16Second-Degree Price DiscriminationQuantity$/QDMRMCACP0Q0Without discrimination:P=P0 and Q=Q0.With second-degreediscriminatio
13、n there are threeprices P1,P2,and P3.(e.g.electric utilities)P1Q11st BlockP2Q2P3Q32nd Block 3rd BlockSecond-degree pricediscrimination is pricingaccording to quantityconsumed-or in blocks.17Second-Degree Price DiscriminationQuantity$/QDMRMCACP0Q0P1Q11st BlockP2Q2P3Q32nd Block 3rd BlockEconomies of s
14、cale permit:Increase consumer welfareHigher profits18Price DiscriminationnThird Degree Price Discrimination1)Divides the market into two-groups.2)Each group has its own demand function.19Price DiscriminationnThird Degree Price Discrimination3)Most common type of pricediscrimination.uExamples:airline
15、s,liquor,vegetables,discounts to students and senior citizens.20Price DiscriminationnThird Degree Price Discrimination4)Third-degree price discrimination is feasible when the seller can separate his/her market into groups who have different price elasticities of demand(e.g.business air travelers ver
16、sus vacation air travelers)21Price DiscriminationnThird Degree Price DiscriminationlObjectivesuMR1=MR2uMC1=MR1 and MC2=MR2uMR1=MR2=MC22Price DiscriminationnThird Degree Price DiscriminationlP1:price first grouplP2:price second grouplC(Qr)=total cost of QT=Q1+Q2lProfit()=P1Q1+P2Q2-C(Qr)23Price Discri
17、minationnThird Degree Price DiscriminationlSet incremental for sales to group 1=0l l 24Price DiscriminationnThird Degree Price DiscriminationlSecond group of customers:MR2=MClMR1=MR2=MC 25Price DiscriminationnThird Degree Price DiscriminationlDetermining relative pricesl 26Price DiscriminationnThird
18、 Degree Price DiscriminationlDetermining relative pricesl lPricing:Charge higher price to group with a low demand elasticity 27Price DiscriminationnThird Degree Price DiscriminationlExample:E1=-2&E2=-4 l lP1 should be 1.5 times as high as P228Third-Degree Price DiscriminationQuantityD2=AR2MR2$/QD1=A
19、R1MR1Consumers are divided intotwo groups,with separatedemand curves for each group.MRTMRT=MR1+MR229Third-Degree Price DiscriminationQuantityD2=AR2MR2$/QD1=AR1MR1MRTMCQ2P2QTQT:MC=MRTGroup 1:P1Q1;more elasticGroup 2:P2Q2;more inelasticMR1=MR2=MCQT control MCQ1P1MC=MR1 at Q1 and P130No Sales to Smalle
20、r MarketEven if third-degree pricediscrimination is feasible,it doesntalways pay to sell to both groupsof consumers if marginal cost is rising.31No Sales to Smaller MarketQuantityD2MR2$/QMCD1MR1Q*P*Group one,with demand D1,are not willing to pay enoughfor the good tomake pricediscrimination profitab
21、le.32The Economics of Coupons and RebatesnThose consumers who are more price elastic will tend to use the coupon/rebate more often when they purchase the product than those consumers with a less elastic demand.nCoupons and rebate programs allow firms to price discriminate.Price Discrimination33Price
22、 Elasticities of Demand for Users Versus Nonusers of CouponsToilet Price ElasticityProductNonusersUsers34Price ElasticityProductNonusersUsersPrice Elasticities of Demand for Users Versus Nonusers of Coupons35The Economics of Coupons and RebatesnCake MixlNonusers of coupons:PE=-lUsers:PE36The Economi
23、cs of Coupons and RebatesnCake Mix Brand(Pillsbury)lPE:8 to 10 times cake mix PEnExamplelPE Users:-4lPE Nonusers:-237The Economics of Coupons and RebatesnUsing:nPrice of nonusers should be 1.5 times userslOr,if cake mix sells for$1.50,coupons should be 50 cents 38Airline FaresnDifferences in elastic
24、ities imply that some customers will pay a higher fare than others.nBusiness travelers have few choices and their demand is less elastic.nCasual travelers have choices and are more price sensitive.39Elasticities of Demand for Air Travel Fare CategoryElasticityFirst-ClassUnrestricted CoachDiscount40A
25、irline FaresnThe airlines separate the market by setting various restrictions on the tickets.lLess expensive:notice,stay over the weekend,no refundlMost expensive:no restrictions41Intertemporal PriceDiscrimination and Peak-Load PricingnSeparating the Market With TimelInitial release of a product,the
26、 demand is inelasticuBookuMovieuComputer42nSeparating the Market With TimelOnce this market has yielded a maximum profit,firms lower the price to appeal to a general market with a more elastic demand uPaper back booksuDollar MoviesuDiscount computersIntertemporal PriceDiscrimination and Peak-Load Pr
27、icing43Intertemporal Price DiscriminationQuantityAC=MC$/QOver time,demand becomesmore elastic and price is reduced to appeal to the mass market.Q2MR2D2=AR2P2D1=AR1MR1P1Q1Consumers are dividedinto groups over time.Initially,demand is lesselastic resulting in a price of P1.44nDemand for some products
28、may peak at particular times.lRush hour trafficlElectricity-late summer afternoonslSki resorts on weekendsIntertemporal PriceDiscrimination and Peak-Load PricingPeak-Load Pricing45nCapacity restraints will also increase MC.nIncreased MR and MC would indicate a higher price.Peak-Load PricingIntertemp
29、oral PriceDiscrimination and Peak-Load Pricing46nMR is not equal for each market because one market does not impact the other market.Peak-Load PricingIntertemporal PriceDiscrimination and Peak-Load Pricing47MR1D1=AR1MCP1Q1Peak-load price=P1.Peak-Load PricingQuantity$/QMR2D2=AR2Off-load price=P2.Q2P2
30、48How to Price a Best Selling NovelnWhat Do You Think?1)How would you arrive at the price for the initial release of the hardbound edition of a book?49How to Price a Best Selling NovelnWhat Do You Think?2)How long do you wait to release the paperback edition?Could the popularity of the book impact y
31、our decision?50nWhat Do You Think?3)How do you determine the price for the paperback edition?How to Price a Best Selling Novel51The Two-Part TariffnThe purchase of some products and services can be separated into two decisions,and therefore,two prices.52The Two-Part TariffnExamples1)Amusement ParkuP
32、ay to enteruPay for rides and food within the park2)Tennis ClubuPay to joinuPay to play53The Two-Part TariffnExamples3)Rental of Mainframe ComputersuFlat FeeuProcessing Time4)Safety RazoruPay for razoruPay for blades54The Two-Part TariffnExamples5)Polaroid FilmuPay for the camerauPay for the film55T
33、he Two-Part TariffnPricing decision is setting the entry fee(T)and the usage fee(P).nChoosing the trade-off between free-entry and high use prices or high-entry and zero use prices.56Usage price P*is set whereMC=D.Entry price T*is equal to the entire consumer surplus.T*Two-Part Tariff with a Single
34、ConsumerQuantity$/QMCP*D57D2=consumer 2D1=consumer 1Q1Q2The price,P*,will be greater than MC.Set T*at the surplus value of D2.T*Two-Part Tariff with Two ConsumersQuantity$/QMCABC58The Two-Part TariffnThe Two-Part Tariff With Many Different ConsumerslNo exact way to determine P*and T*.lMust consider
35、the trade-off between the entry fee T*and the use fee P*.uLow entry fee:High sales and falling profit with lower price and more entrants.59The Two-Part TariffnThe Two-Part Tariff With Many Different ConsumerslTo find optimum combination,choose several combinations of P,T.lChoose the combination that
36、 maximizes profit.60Two-Part Tariff withMany Different ConsumersTProfit:entry fee:salesT*Total profit is the sum of the profit from the entry fee andthe profit from sales.Both depend on T.61The Two-Part TariffnRule of ThumblSimilar demand:Choose P close to MC and high TlDissimilar demand:Choose high
37、 P and low T.62The Two-Part TariffnTwo-Part Tariff With A TwistlEntry price(T)entitles the buyer to a certain number of free unitsuGillette razors with several bladesuAmusement parks with some tokensuOn-line with free time63Polaroid Camerasn1971 Polaroid introduced the SX-70 cameranWhat Do You Think
38、?lHow would you price the camera and film?64Polaroid CamerasnHint65Pricing Cellular Phone ServicenQuestionlWhy do cellular phone providers offer several different plans instead of a single two-part tariff with an access fee and per-unit charge?66BundlingnBundling is packaging two or more products to
39、 gain a pricing advantage.nConditions necessary for bundlinglHeterogeneous customerslPrice discrimination is not possiblelDemands must be negatively correlated67BundlingnAn example:Leasing“Gone with the Wind”&“Getting Gerties Garter.”lThe reservation prices for each theater and movie are:Gone with t
40、he Wind Getting Gerties GarterTheater A$12,000$3,000Theater B$10,000$4,00068BundlingnRenting the movies separately would result in each theater paying the lowest reservation price for each movie:lMaximum price Wind=$10,000lMaximum price Gertie=$3,000nTotal Revenue=$26,00069BundlingnIf the movies are
41、 bundled:lTheater A will pay$15,000 for bothlTheater B will pay$14,000 for bothnIf each were charged the lower of the two prices,total revenue will be$28,000.70BundlingnNegative Correlated:Profitable to BundlelA pays more for Wind($12,000)than B($10,000).lB pays more for Gertie($4,000)than A($3,000)
42、.Relative Valuations71BundlingnIf the demands were positively correlated(Theater A would pay more for both films as shown)bundling would not result in an increase in revenue.Gone with the Wind Getting Gerties GarterTheater A$12,000$4,000Theater B$10,000$3,000Relative Valuations72BundlingnIf the movi
43、es are bundled:lTheater A will pay$16,000 for bothlTheater B will pay$13,000 for bothnIf each were charged the lower of the two prices,total revenue will be$26,000,the same as by selling the films separately.73BundlingnBundling Scenario:Two different goods and many consumerslMany consumers with diff
44、erent reservation price combinations for two goods74Reservation Pricesr2(reservationprice Good 2)r1(reservation priceGood 1)$5$10$5$10$6$3.25$8.25$3.25ConsumerAConsumerCConsumerBConsumer A is willing to pay up to$3.25 for good 1 andup to$6 for good 2.75Consumption Decisions WhenProducts are Sold Sep
45、aratelyr2r1P2IIConsumers buyonly good 2P1Consumers fall intofour categories basedon their reservationprice.IConsumers buyboth goodsIIIConsumers buyneither goodIVConsumers buyonly Good 176Consumption DecisionsWhen Products are Bundledr2r1Consumers buy the bundlewhen r1+r2 PB(PB=bundle price).PB=r1+r2
46、 or r2=PB-r1Region 1:r PBRegion 2:r PB)Consumers donot buy bundle(r PB)77nThe effectiveness of bundling depends upon the degree of negative correlation between the two demands.Consumption DecisionsWhen Products are Bundled78Reservation Pricesr2r1P2P1If the demands are perfectly positivelycorrelated,
47、the firmwill not gain by bundling.It would earn the sameprofit by selling the goods separately.79Reservation Pricesr2r1If the demands are perfectly negativelycorrelated bundling is the ideal strategy-all theconsumer surplus canbe extracted and a higherprofit results.80Movie Exampler2r1Bundling pays
48、due to negative correlation(Wind)(Gertie)5,00014,00010,0005,00010,00012,0004,0003,000BA81BundlingnMixed BundlinglSelling both as a bundle and separatelynPure BundlinglSelling only a package82Mixed Versus Pure Bundlingr2r1102030405060708090100102030405060708090100C2=MC2C2=30Consumer A,for example,has
49、 a reservation price for good 1 that is below marginal cost c1.With mixed bundling,consumer A is induced to buy only good 2,whileconsumer D is induced to buy only good 1,reducing the firms cost.ABDCC1=MC1C1=20With positive marginalcosts,mixed bundling may be more profitablethan pure bundling.83Bundl
50、ingnScenariolPerfect negative correlationlSignificant marginal costMixed vs.Pure Bundling84BundlingnObservationslReservation price is below MC for some consumerslMixed bundling induces the consumers to buy only goods for which their reservation price is greater than MCMixed vs.Pure Bundling85Bundlin