Transcript AdvPric

Commercial Speech
Sales, promotion, advertising,
warranties, and brands create
value by providing information,
thereby reducing transaction costs
Transaction costs
• Search costs -- cost of obtaining knowledge of
the PRODUCT including the consequences of
its use and its alternatives
• Bargaining costs -- cost of arriving at a
mutually satisfactory EXCHANGE
• Monitoring and enforcement costs -- cost of
insuring compliance with AGREEMENT
Varieties of commercial speech
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Sales
Promotion
Advertising
Warranties
Brands
Commercial speech’s down side
Sales, promotion, advertising, and
brands REDUCE VALUE when they
provide MISINFORMATION
– Protect honest commercial speech
– Prohibit false commercial speech
The effect of Transaction Costs
and the Benefits of Advertising
Three cases
• Zero transactions costs
• Total transaction costs
• Marginal transactions costs
Payoff to commercial speech
• Social benefits of advertising will depend upon
both supply and demand for product
• Many close substitutes, many undifferentiated
products, low social payoff
• Few close substitutes, differentiated products,
high social payoff
• Also where payoff to the firm is HIGHEST
Anti-Trust
Predation
Price discrimination
Price discrimination
• At least two consumer segments exist
• Firm can identify consumers in each
group, and set prices differently
• Firm must be able to prevent consumers
in one group from selling to consumers in
the other (no arbitrage).
1st degree price discrimination
3rd degree price discrimination
3rd degree price discrimination
through time
Multi-part or nonlinear pricing I
Two-part tariffs can be used as means of 1st degree
price discrimination to extract the full consumer
surplus from the customer.
How does this work?
– Lump sum service charge, equal to or less than the full
consumer surplus at optimal output levels;
– Volume charge based on marginal cost.
– You need full information as to the demand schedule of
each customer/market segment.
Multi-part or nonlinear pricing II
More often, multipart tariffs are used as a means of
practicing third-degree price discrimination.
This also requires considerable information about
consumer tastes and preferences. One of the beauties
of two-part tariffs is that they can be used to
OBTAIN knowledge about consumer tastes and
preferences by designing price structures that lead
consumers to self-select themselves into classes
Example: Restaurants: buffet, price-fixe, a la carte
Multi-part or nonlinear pricing II