Beruflich Dokumente
Kultur Dokumente
MARKET POWER-II
ME, SESSION 13
13th August, 2012
PROF. SAMAR K. DATTA
Two-Part Pricing
When it isnt feasible to charge different
prices for different units sold, but demand
information is known, two-part pricing may
permit you to extract all surplus from
consumers.
Two-part pricing consists of a fixed fee
and a per unit charge.
Example: Athletic club memberships.
10
8
6
Per Unit 4
Charge
MC
D
1
Quantity
Amusement Park
Pay to enter
Pay for rides and food within the park
2) Tennis Club
Pay to join
Pay to play
P*
MC
D
Quantity
=2T*+(P*-MC).(Q1+Q2)>2ABC
P*
MC
D1 = consumer 1
D2 = consumer 2
Q2
Q1
Quantity
Rule of Thumb
Advertising
Assumptions
Firm sets only one price
Firm knows Q(P,A)
How quantity demanded depends on price
and advertising
Effects of Advertising
AR and MR are average
and marginal revenue when
the firm doesnt advertise.
$/Q
MC
P1
AC
P0
AR
AC
MR
AR
MR
Q0
Q1
Quantity
Advertising
Choosing Price and Advertising Expenditure
PQ( P, A) C (Q) A
Q
Q
MRAds P
1 MC
full MC of adv.
A
A
A Rule of Thumb for Advertising
( P MC ) / P 1 / E P for pricing
Q
( P-MC )
1
A
P MC A Q
A
P
PQ
Q A
Advertising
A Rule of Thumb for Advertising
To maximize profit, the firms advertisingto-sales ratio should be equal to minus the
ratio of the advertising and price elasticities
of demand
Advertising An Example
R(Q) = $1 million/yr
$10,000 budget for A (advertising--1% of
revenues)
EA = 0.2 (increase budget $20,000, sales increase
by 20%
EP = -4 (markup price over MC is substantial)
YES
A/PQ = -(0.2/-4) = 5%
Increase budget to $50,000
Interdependence in production
Single marginal cost curve for both products or
product package; e.g., beef & hides
Prices etc.
MC
MRT
MRT
DB
MRB
PB
MRH
PH
X* MRH
MRB
DH
Quantity
As MR for B<0 at Q1, (Q1-Q0) amount of product B ought to be kept off the
market for maximization of
Bundling
Bundling is packaging two or more
products to gain a pricing advantage.
Conditions necessary for bundling
Heterogeneous customers
Price discrimination is not possible
Demands must be negatively correlated
Spiderman
Spaceballs
Theater A
$12,000
$3,000
Theater B
$10,000
$4,000
Theater A
$12,000
$4,000
Theater B
$10,000
$3,000
Consumer
C
$10
$6
Consumer A is
willing to pay up to
$3.25 for good 1 and
up to $6 for good 2.
Consumer
A
Consumer
B
$5
$3.25
$3.25
$5
$8.25 $10
r1 (reservation
price Good 1)
r1 P1
r1 P1
r2 P2
r2 P2
II
Consumers buy
only good 2
P2
Consumers buy
both goods
r1 P1
r1 P1
r2 P2
r2 P2
III
IV
Consumers buy
neither good
Consumers buy
only Good 1
P1
r1
Consumption
When Products
Decisions
are Bundled
r2
I
Consumers
buy bundle
(r > PB)
r2 = PB - r1
II
Consumers do
not buy bundle
(r < PB)
r1
Consumption Decisions
When Products are Bundled
Buyers of
good 2 who
now buy
good 1 also
Buyers of
good 2 lost
to the firm
Buyers of
good 1 who
now buy
good 2 also
Buyers of
good 1 lost
to the firm
10,000
5,000
4,000
B
A
3,000
5,000
r1 (Spaceballs)
C1 = MC1 = 20
90
80
70
60
50
40
B
C
C2 = MC2 = 30
30
20
10
10 20 30 40 50 60 70 80 90 100
r1
Mixed Bundling
with Zero Marginal Costs
P1
P2
PB
Profit
$80
---- $320
Pure bundling
----
----
$100 $400
Mixed bundling
$90
$90
$120 $420
Mixed Bundling
with Zero Marginal Costs
r2
120
In this example, consumers B and C
are willing to pay $20 more for the bundle
than are consumers A and D. With
mixed bundling, the price of the bundle
can be increased to $120.
A & D can be charged $90 for a single good.
100
90
80
60
C
40
20
10
10 20
40
60
80 90 100
120
r1
Tying