Transcript Chapter11 Powerpoint Slides

The Economics of
Organisations and Strategy
Chapter 11
Price Discrimination and Bundling
The Economics of
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Chapter 11 - Question 1
Price discrimination is correctly defined as charging
customers for the same product:
A
Different point of sale prices;
B
Prices that are in different ratios to a common
marginal cost;
C
A different price if they buy in bulk;
D
Higher prices the more they buy.
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Chapter 11 - Question 2
Which of the following is not a recognised form of
price discrimination:
A
B
Customers are separated into distinct groups and
each group is charged a different price;
Output is sold in tranches at successively lower
prices;
C
Customers are charged a flat entrance fee and a fixed
price per unit consumed;
D
Each unit of output is sold at a different price.
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Chapter 11 - Question 3
Which of the following statements are true for first
degree price discrimination?
A
The demand curve becomes the firm’s marginal
revenue curve;
B
Economic rent is maximised;
C
Consumers’ surplus is reduced to zero;
D
All of the above.
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Chapter 11 - Question 4
Second degree price discrimination is also known
as:
A
Curvi-linear pricing;
B
Non-linear pricing;
C
Parallel pricing;
D
Consumer pricing.
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Chapter 11 - Question 5
Which of the following is not a necessary condition for
third degree price discrimination to be effective in
increasing a firm’s revenue:
A
The firm must benefit from economies of scale;
B
Different groups of consumers value the product
differently;
C
The firm must be able to prevent arbitrage;
D
Different groups of consumers have different search
costs.
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Chapter 11 - Question 6
Another form of price discrimination is basing point
pricing. This pricing system is based on an industry
wide agreement that prices will be based on:
A
A published list price for the industry, plus delivery
transport costs;
B
Firm determined prices, plus delivery transport costs;
C
A basic price that includes all transport costs from factory
to delivery;
D
Published list prices at specific locations, plus delivery
transport costs.
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Chapter 11 - Question 7
A widely used form of price discrimination is
bundling. This system is based on two or more
products:
A
Being viewed by consumers as complementary;
B
Being packaged in identical containers;
C
Being sold together;
D
Being offered at slightly different prices.
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Chapter 11 - Question 8
Which of the following is not a possible consequence
of price discrimination, and therefore unlikely to be
investigated by competition authorities:
A
Charging excessively high prices to some consumers;
B
Increasing the overall supply and reducing unit costs;
C
Charging predatory prices in one market segment;
D
An intermediate supplier favouring some customers.
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Chapter 11 – Answer 1
Correct answer: there is more than one reason why
customers might be charged different prices and
not be subject to price discrimination. For
example, customers buying in bulk will reduce the
supplying firm’s marginal cost and hence justify a
lower price. It follows that a more robust definition
refers to charging customers different prices when
the marginal costs of supply are identical.
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Chapter 11 - Answer 2
Correct answer: Charging a flat entrance fee and
then a uniform price to customers is not
discrimination – all customers are treated the
same. Buttons A, B and D represented third,
second and first degree price discrimination
respectively.
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Chapter 11 - Answer 3
Correct answer: By charging each customer their
reservation price, points on the demand curve
show the increase in revenue when a new customer
purchases the product. The effect of this is to
transfer the whole of the area under the demand
curve above marginal costs to the firm in the form
of rent, an outcome that involves reducing
consumers’ surplus to zero.
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Chapter 11 - Answer 4
Correct answer: Second degree price
discrimination results in the price paid varying
inversely with the quantity purchased; hence,
the more a customer purchases in a given
period, the lower the average price paid.
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Chapter 11 - Answer 5
Correct answer: Third degree price discrimination
involves selling the same product to different groups
of consumers at prices that are in different ratios to a
common marginal cost. If those buying in the lower
priced market can sell to those in the higher priced
market (ie, arbitrage) discrimination will not work. In
order to pay a higher price, members of a group must
either attach more value to the product, or their costs
of search are high.
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Chapter 11 - Answer 6
Correct answer: The basing point form of price
discrimination is based on industry wide
cooperation, whereby industry rivals agree that
delivered prices will be based on published list
prices at specific locations, plus the cost of
transport from these locations to the point of
delivery.
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Chapter 11 - Answer 7
Correct answer: Where consumers have
heterogeneous demands for two (or more)
products, their valuations for the two products will
vary. If the two products are offered as a bundle,
then providing the bundled price does not exceed
the sum of individuals’ reservation prices, the firm
will sell more of both products, greatly increasing
revenue.
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Chapter 11 - Answer 8
Correct answer: Price discrimination can raise a
number of issues for the competition authorities.
These arise if it is used to exploit market power or to
create a barrier to entry. Price discrimination rarely
involves an overall increase in supply, but if the result
was lower unit costs and lower average prices the
competition authorities would be pleased.
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