Pricing Techniques

Two Part Tariffs

A producer may sometimes require, the consumer to pay an initial fee for the right to buy its product as well as a usage fee for each unit of the product that he or she buys.

Tying
Tying is a pricing technique that is used when the products are complementary to each other

Bundling
A firm requires customers who buy one of its products to buy another of its products as well.

Max Price that the theater would pay for the two movies, leased separately or as bundle
Movie
Alvin Casablanca The God Father Bundle $ 12,000 $ 8,000 $ 20,000

Theater
Palace $ 9,000 $ 10,000 $ 19,000

Cost Plus Pricing

Cost plus pricing or full cost pricing is a technique used by a large number of firms The typical form involves two steps The firm estimates the cost/unit of output of the product The firm adds a mark up (is meant to include certain costs that cannot be allocated to any specific product and to provide a return on the firms investment)

Transfer Pricing
The price at which a product gets transferred from one division to the other is called as Transfer pricing.

Price Discrimination
Price Discrimination: refers to the charging of different prices for different quantities of commodity or in different markets which are not justified by cost differences. Price Discrimination of first degree Price Discrimination of Second degree Price Discrimination of Third degree

Price Discrimination of first degree

If a monopolist could sell each unit of the commodity separately and charge the highest price each consumer is willing to pay for the commodity rather than go without it , the monopolist would be able to extract the entire consumers surplus from the consumer

Price Discrimination of Second degree

Refers to the charging of a uniform price per unit for an specific quantity, a lower price per unit for an additional batch of the commodity and so on By doing so the monopolist will be able to extract a part but not all of the consumers surplus

Price Discrimination of third degree

Charging different prices in different markets is called as the third degree price discrimination.

Oligopoly
Kinked demand curve Collusion or Cartel

Kinked Demand Curve

Introduced by Paul Sweezy in 1939 Oligopolist face a demand curve that is highly elastic for price rise and less elastic for price reductions, hence remains at one level for a considerable time showing a kink on the demand curve

Collusive Agreement
Since the number of firms are less they are aware of the interdependency for a clear increased profit, less uncertainty and better opportunity to prevent entry If the purpose of the cartel is to maximize cartel profits, it will allocate sales to firms in such a way that the MC of all the firms is equal

Sales are often distributed in accord with a firms level of sales in the past or the production capacity and may also be geographically. Price is set by a leader

Centralized Cartel
Centralized Cartel sets the monopoly price for the commodity, allocates the monopoly output among the member firms and determines how the monopoly profits are to be shared.

Market Sharing Cartel

Here the member firms agree only on how to share the market. Each firm operates in only one area or region agreed upon, without encroaching on the other territories.

Price Leadership Cartel

The firm generally recognized as the price leader starts the price change and the other firms in the industry quickly follow. The price leader is usually the dominant or the largest firm in the Industry.