...Price Discrimination | | Most businesses charge different prices to different groups of consumers for what is more or less the same good or service! This is price discrimination and it has become widespread in nearly every market. This note looks at variations of price discrimination and evaluates who gains and who loses?What is price discrimination?Price discrimination or yield management occurs when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs. It is important to stress that charging different prices for similar goods is not pure price discrimination. We must be careful to distinguish between price discrimination and product differentiation – differentiation of the product gives the supplier greater control over price and the potential to charge consumers a premium price because of actual or perceived differences in the quality / performance of a good or service.Conditions necessary for price discrimination to workEssentially there are two main conditions required for discriminatory pricing * Differences in price elasticity of demand between markets: There must be a different price elasticity of demand from each group of consumers. The firm is then able to charge a higher price to the group with a more price inelastic demand and a relatively lower price to the group with a more elastic demand. By adopting such a strategy, the firm can increase its total revenue and profits (i...
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...Price discrimination: For a firm to engage in price discrimination, at least one of the following conditions should be met. Either a firm should be operating in monopoly market or a firm should discourage discount customers from becoming resellers or a firm should have extensive customer data to segment its customers into different price elasticity of demand groups. I believe that house painting firm would engage most in price discrimination because, the painting firm has the opportunity to observe its customers and access how much a customer is willing to pay to paint his/her house before quoting price for the painting job. With this information, a house painting firm is in better position to engage in price discrimination. Other factors such as inability of the customers to resell the service and the costs involved in getting the competitive quotes help painting firm to engage in price discrimination. Manufacturer that produces racing boats also has the opportunity to observe its customers and access how much a customer is willing to pay for boat. Also another aspect that racing boats are purchased only by a few set of people and if the manufactured can get race winners to buy racing boats from them, then the manufacturer can show price discrimination towards other customers because, many people will believe that boats manufactured by that manufacturer are of superior quality. But again since manufacturer will not be able to prevent the customer who avails a racing boat...
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...marginal costs. Setting prices equal to marginal cost will generally not recoup sufficient revenue to cover the fixed costs and the standard economic recommendation of "price at marginal cost" is not economically viable. Some other mechanism for achieving efficient allocation of resources must be found. The outcome of this investigation is that (i) efficient pricing in such environments will typically involve prices that differ across consumers and type of service; (ii) producers will want to engage in product and service differentiation in order for this differential pricing to be feasible; and, (iii)differential pricing will arise naturally as a result of profit seeking by firms. It follows that differential pricing can generally be expected to contribute to economic efficiency Thus differential pricing is “the practice of selling the same product to different customers at different prices even though the cost of sale is the same to each of them. More precisely, it is selling at a price or prices such that the ratio of price to marginal costs is different in different sales” TYPES OF DIFFERENTIAL PRICING * First-degree price discrimination means that the producer sells different units of output for different prices and these prices may differ from person to person. This is sometimes known as the case of perfect price discrimination. * Second-degree price discrimination means that the producer sells different units of output for different prices, but every...
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...Managerial Economics Unit 4: Price discrimination Rudolf Winter-Ebmer Johannes Kepler University Linz Winter Term 2012 Managerial Economics: Unit 4 - Price discrimination 1 / 39 OBJECTIVES Objectives ◮ Explain how managers use price discrimination to increase profits ⋆ ⋆ Identify submarkets with different price elasticities of demand Segment the market and charge different prices to consumers in each submarket Managerial Economics: Unit 4 - Price discrimination 2 / 39 MOTIVATION FOR PRICE DISCRIMINATION Figure 8.1: Single-Price Monopolist Profit-Maximizing Outcome ◮ ◮ Single-price monopoly equilibrium fails to capture all consumer surplus and also results in a dead-weight loss. Price discrimination provides a strategic mechanism for capturing some, or all, of this lost surplus. Managerial Economics: Unit 4 - Price discrimination 3 / 39 Managerial Economics: Unit 4 - Price discrimination 4 / 39 PRICE DISCRIMINATION Price discrimination: When the same product is sold at more than one price ◮ ◮ Differences in price among similar products are not necessarily evidence of price discrimination; Costs could also be different. Managerial Economics: Unit 4 - Price discrimination 5 / 39 PRICE DISCRIMINATION First-Degree Price Discrimination ◮ ◮ ◮ ◮ ◮ All customers are charged a price equal to their reservation price. The firm captures 100 percent of the consumer surplus. Equilibrium output and marginal...
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...Indian railways hold monopoly in rail transport in India. Source of their market power can be attributed to following factors 1. Capital Intensive venture, which can be understood from the fact that Indian railways has a separate budget each year 2. Economies of scale, as Indian railways operate all over India and thus have sufficient operating domain to achieve economies of scale which a new entrant cannot easily replicate 3. Government rules and regulations Indian railways has a position, which is not possible in perfectly competitive markets, where it can charge different price to different group of consumers for an identical product, even though the cost of each such saleable unit remains same. The report will discuss how Indian Railways uses its monopolistic position in Indian Rail transport industry to engage in policy of price discrimination. Price discrimination Price...
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...Price Discrimination in the Airline Market: The Effect of Market Concentration Joanna Stavins * Federal Reserve Bank of Boston 600 Atlantic Avenue Boston, MA 02106 (617) 973-4217 e-mail: joanna.stavins@bos.frb.org November 25, 1996 * Economist, Federal Reserve Bank of Boston. The views expressed in this paper are those of the author and do not necessarily reflect the official views of the Federal Reserve Bank of Boston or the Federal Reserve System. Price Discrimination in the Airline Market: The Effect of Market Concentration Joanna Stavins ABSTRACT Economic theory suggests that a monopolist can price discriminate more successfully than can a perfectly competitive firm. Most real-life markets, however, fall somewhere in between the two extremes. What happens as the market becomes more competitive: Does price discrimination increase or decrease? This paper examines how price discrimination changes with market concentration in the airline market. The paper uses data on prices and ticket restrictions across various routes within the United States, controlling for distances and airport gate restrictions. Price discrimination is found to increase as the markets become more competitive. Price Discrimination in the Airline Market: The Effect of Market Concentration Joanna Stavins In a perfectly competitive market, firms have no market power to discriminate by price. At the other extreme, a monopolist can, provided he has information about...
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...monopolist "fights" (that is, sets a low price after the entrant comes in), the new firm will lose money. If the monopolist accommodates (continues to charge a high price), the new firm will make a profit. | | | | |Entrant | | | | Enter | Don't Enter | | Monopolist | | | | | | | | | | | Price High | 20,10 | 50,0 | | | Price Low | 5, -10 | 10,0 | a) What is the Nash equilibrium of this game? 20,10 is the Nash Equilibrium because when monopolist keeps its price high that is when the game is at the Nash equilibrium. b) Is the monopolist's threat to charge a low price credible? That is, if the entrant has come, would it make sense for the monopolist to charge a low price? Explain. - No, it would not be a creditable...
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...Executive Summary This report focuses on the use effective pricing strategies to maximize profits from F1 ticket sales. We believe this to be an important objective for the F1 management given high costs of hosting the F1 race each year. Effective pricing strategies can help to recoup the cost of the race and possibly even generate revenue for the organizers. The first part of this report focuses on the effectiveness of existing price strategies such as perception based pricing, price discrimination, bundling and discount management. Our analysis suggests that the F1 tickets in Singapore are wrongly priced as it fails to capture perceived benefits such as having a city track and being the first ever night race. It is, however, too late to reset the price as the reference point has been established. Next, we argue that while the use of price discrimination has increased the total revenue from ticket sales, the extensive use of early-bird based pricing has reduced the effectiveness of discount pricing. While some bundling strategies currently in place, we believe that more can be done to increase the perceived value and to capture greater market share. We have provided suggests for this in section 7. We further evaluated the use of discount management for quantity purchases and conclude that the use of high discount (≈15%) for greater quantity sale will only be financially justified through high volume sales. Finally, we propose several solutions to increase F1 revenue yield...
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...www.cambridge.org/micro4mbas McKENZIE: MICROECONOMICS FOR MBAS PPC CMYBLK ................................................................................................................ 10 Monopoly power and firm pricing decisions If monopoly persists, monopoly will always sit at the helm of government … its bigness is an unwholesome inflation created by privileges and exemptions which it ought not to enjoy. If there are men in this country big enough to own the government of the United States, they are going to own it. Woodrow Wilson That competition is a virtue, at least as far as enterprises are concerned, has been a basic article of faith in the American Tradition, and a vigorous antitrust policy has long been regarded as both beneficial and necessary, not only to extend competitive forces into new regions but also to preserve them where they may be flourishing at the moment. G. Warren Nutter and Henry Alder Einhorn t the bottom of almost all arguments against the free market is a deep-seated concern about the distorting (some would say corrupting) influence of monopolies. People who are suspicious of the free market fear that too many producers are unchecked by the forces of competition, but instead hold considerable monopoly power or control over market outcomes. Unless the government intervenes, these firms are likely to exploit their power for their own selfish benefit. This theme has been fundamental to the writings of economist John Kenneth Galbraith: The...
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...oligopoly play a major part in setting price. Market structures can then influence the objectives and behavior within a firm (Sloman & Wride, 2009). This can lead to the use of different pricing strategies, thus having varied effects on the level of price set. Traditional theory suggests that a firms’ main objective is profit maximization. Therefore, prices will be set in line to meet this objective. A monopoly is defined as one dominant firm in the industry. In theory, a monopoly will have inelastic demand due to no available substitutes. Therefore the firm will be a “price maker”. They can use their market power to control price and raise it to a level where price is greater than marginal cost (Sloman & Wride, 2009). Average cost Marginal cost Average revenue Marginal revenue Output Price 0 Q1 P1 Average cost Marginal cost Average revenue Marginal revenue Output Price 0 Q1 P1 Source: Adapted from Sloman & Wride, 2009. Fig.1. Diagram shows that a profit maximizing monopoly has the ability to profit maximize where marginal cost equals marginal revenue, and will therefore produce at output (Q1). Hence they will charge price (P1) that consumers are willing and able to pay for Q1. At price P1, the monopolist is making excess profit (highlighted). In perfect competition firms are “price takers” and will therefore charge the market price, whereas a monopolist will charge a relatively higher price and produce lower output. Therefore...
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...industry uses a different mechanisms to price discriminate (PD) consumers with varying elasticities of demand in terms of travel.[1] In this case study, I will investigate PD based on the day of the week a ticket is purchased. In theory, this method of price discrimination is very feasible as airfares can be easily changed on a day to day basis. For example, consumers who travel on any given day of the week but purchase on the weekend may have different PED than those consumers who purchase their tickets during the week. By comparing different days of the week and ticket prices, we can study whether the airline industry has identified this method as a valuable segmenting device. I will start this case study by defining the theory of PD then continue by assessing data regarding ticket prices and day of week of which purchased then conclude if there is enough evidence of PD. Price discrimination is the practice of charging consumers different prices for the same good or service, whereby the relevant price in each case depends on the buyers characteristics. The most common form of PD would include grouping consumers based on certain attributes and charging these groups a different price. In pure price discrimination, the price of a good or service will be set at the maximum of which each consumer is willing to pay. The goal of PD is to gain an extra slice of untapped revenue source from consumers who are willing to pay a higher price and those consumers who are only willing...
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...Indian railways hold monopoly in rail transport in India. Source of their market power can be attributed to following factors 1. Capital Intensive venture, which can be understood from the fact that Indian railways has a separate budget each year 2. Economies of scale, as Indian railways operate all over India and thus have sufficient operating domain to achieve economies of scale which a new entrant cannot easily replicate 3. Government rules and regulations Indian railways has a position, which is not possible in perfectly competitive markets, where it can charge different price to different group of consumers for an identical product, even though the cost of each such saleable unit remains same. The report will discuss how Indian Railways uses its monopolistic position in Indian Rail transport industry to engage in policy of price discrimination. Price discrimination Price discrimination...
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...TOPIC 1: MARKET STRUCTURE AND MARKET POWER 1.1. Competitors Anyone that produces a substitute for a firm’s product. - Cross price elasticity: Measures the substitution degree of a product for another. P.E.>1 – The demand is elastic, a change in price is reflected as an even major change in demand. The extent of the variation is higher as higher is the substitution degree of a product for another. We can say two firms are competing when a price increase by one firm, drives its customers to the other firm. P.E. P (find higher prices). Relevant Geographic Market Imports and Transportation costs. b. Difficulties when defining a market Product differentiation is usually due to small characteristics of the product. e.g. Diet coke belongs to cola market, light cola market and soft drinks market. The idea of competitors today is completely different from the one we had in the past. Sometimes we need to look outside the industry. e.g. go by car with 4 persons vs go alone by train. 1.3.2. Market Structure: # and characteristics of firms in a market. a. Concentration in the market Concentration Index Simple measures to define the market are really useful to take antitrust decisions. It takes into consideration, the number and size of the firms. b. Measuring Market Structure - K-firm concentration ratio Once you have defined the market and relevant players, we define their MS%. Combined share of the k largest firms in the market. Ck = i , si is the MS of firm i and Ck Є...
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...10 Monopoly & its Regulation pp. 221 – 244 Ch.15 Monopolistic Competition pp. 339 – 356 Ch.16 Oligopoly games and Strategies pp. 357 – 380 1 2 3 Market Structure Perfect Competition Monopolistic Competition Oligopoly Duopoly Cartel Monopoly 10 Market Structure Perfect Competition Sell Side • • Perfect Competition • Duopoly • Monopoly • Example One large seller controls market – Telstra in 1990 2 Sellers – Broome Camel Tours, AMD & Intel , Qantas & Ansett Imperfect Competition Buy Side • Monopsony (monopsonist) • Duopsony (duopsonist) • Example Where large buyer controls the market 2 buyers of product • • Oligopoly • More than two • Oligopsony sellers – (oligopsonist) University Education, Car manufacturers, Banks, Fast Food • Several large buyers control the market – i.e. Fast Food industry controls the meat market • Monopolistic Competition ‐ sell side • Small to Medium sized businesses 11 Types of Markets: Perfect and Imperfect Perfect Competition has the following distinguishing characteristics: • • • • Many Buyers & Many Sellers Products are Homogeneous Perfect knowledge of competitors activities ‐ i.e. symmetrical knowledge Firms are Price Takers not Price Maker • • • • Freedom of Entry and Freedom to Exit All PC firms face the same costs Price = Demand = AR= MR. Firms make an economic profit Or an economic loss • No barriers to entry Exam...
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...Price Discrimination Price discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. In a theoretical market with perfect information, no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can only be a feature of monopoly markets. Otherwise, the moment the seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price but with a tiny discount. However, market frictions in oligopolies such as the airlines, and even in fully competitive retail or industrial markets allow for a limited degree of differential pricing to different consumers. Price discrimination also occurs when it costs more to supply one customer than it does another, and yet the supplier charges both the same price. Although the term "discrimination" has negative (e.g. racist, sexist) connotations, the literal meaning of the word "discrimination" (from discriminatio, "a distinction") is neutral. "Price discrimination" is a technical term meaning only differentiation in price by customer, and is not intended as an accusation of criminal or unfairly biased behavior. The effects of price discrimination on social efficiency are unclear; typically such behavior leads to lower prices for some consumers and higher prices for others. Output can be expanded when price discrimination is very...
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