Transcript Chapter 11 Pricing w/Mkt Power

Chapter 11
Pricing w/Mkt Power
• Will cover 11.1 and 11.2.
• Goal of firms with market power:
capture CS and convert it to profits.
• Issue: HOW firms with mkt power
set prices to achieve this goal?
• Key: if exists single mkt P, then
some buyers willing to pay more
than actually paying.
• Solution: charge different prices to
different consumers; also called
price discrimination.
Three Types of
Price Discrimination
• 1st Degree Price Discrimination:
– Extracts ALL the consumer surplus by
charging each buyer exactly the amount
he is willing to pay.
• 2nd Degree PD:
– Known as block pricing: selling first
few Q at one price, next few Q at
another price, etc. (discount for buying
large quantity).
• 3rd Degree PD:
– Most common: dividing consumers
into 2+ groups, each with own demand
curve; charge different price to each
group.
– Examples: airline pricing; movies.
More on 3rd Degree
Price Discrimination
• Key: Must be able to identify
the different groups and then
keep them separate (I.e., enforce
the different prices).
• Firm’s process to pick different
P’s and Q’s:
– Pick total Q such that:
MR1 = MR2 = MC.
• Note: Charge higher price to the
group with the lower price
elasticity of demand.
Firm’s Approach when
Using 3rd Degree PD
• To start: One MC curve, two
demand curves (so two MR
curves).
• See Figure 11.5.
• Approach:
– 1. Sum MR1 + MR2 = MRT.
– 2. Pick QT where MRT = MC.
– 3. At this MRT, find Q1 on MR1
and Q2 on MR2.
– 4. Find P1 off of D1 at Q1 and
find P2 off of D2 at Q2.