review exercise (1)
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Review Exercise (1). #3, p.344 PRGE True or False? A profit maximizaing monopoly faces a demand with constant price elasticity of -2. His marginal cost is also constant at 20$. If his marginal cost rises by 25%, the price he charges will also rise by 25%. Review Exercise (1). - PowerPoint PPT PresentationTRANSCRIPT
Review Exercise (1)
#3, p.344 PRGE
True or False? A profit maximizaing monopoly faces a demand with constant price elasticity of -2. His marginal cost is also constant at 20$. If his marginal cost rises by 25%, the price he charges will also rise by 25%.
Review Exercise (1) #3, p.344 PRGE
PM0 = MC0/(1+1/ED) = 20$/(1-1/2) = 40$
MC1 = (1+0.25)* MC0 = 25$
PM1 = MC1/(1+1/ED) = 25$/(1-1/2) = 50$
∆% PM ?= (PM1- PM
0)/ PM0 = (50$-40$)/40$=...
10$/40$=25% MC ∆ ↑25% PM ∆ ↑25% TRUE
Review Exercise (2)
True or False? A monopoly nerver produces in the inelastic part of the demand curve.
Review Exercise (2)
True or False? A monopoly nerver produces in the inelastic part of the demand curve.
In the inelastic part of the demand curve, by raising the price the monopoly generates higher revenues because the corresponding fall in the quantity demanded is proportionally smaller. Furthermore, the drop in quantity implies a fall in costs.
↑ revenus & ↓ coûts = ↑profits.
The producer would never maintain a level of production in the inelastic part of the demand curve. TRUE
Review Exercise (3)
#18 a) et b) p.346 PRGE
Profit maximizing monopoly;
Q = 144 / P2 CF=5 CVM=Q1/2
a) PM? QM? ProfitsM?
b) What happens if the government imposes a price ceiling of 4$?
Review Exercise (3)
a) MR?
D: Q=144/P2 → P2=144/Q → P=12/Q1/2
Rev = P*Q = (12/Q1/2)*Q = 12 Q1/2,
MR = dRev / dQ = 6/Q1/2
MC? = dCT / dQ = dVC / dQ
VC? AVC=VC/Q VC=AVC*Q
VC= Q1/2*Q = Q3/2
MC = dQ3/2 / dQ = 3/2*Q1/2
Review Exercise (3)
a) MR = MC
6/Q1/2 = 3/2*Q1/2 , 6 = 3/2*Q
12/3 = QM = 4
PM? D(QM)=12/(QM)1/2 = 12/2 = 6 = PM
Profits? (PM*QM) – C(QM)
(6$*4) – (43/2$ + 5$)
24$ - 13$ = 11$ = πM
Review Exercise (3)b) The State fixes a price ceiling at 4$.
D: Q = 144/P2 = 144/16 = 9 = QGOUV
Profits = (4$*9) – (93/2 + 5$) =
36$ - 27$ - 5$ = 4$
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10.0
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Cm Rm D CM
PM
QM
PGOUV
QGOUV
MC MR AC
Pricing strategiesPricing strategies
Introduction
Why do student discounts exist?
Why is a firm like Costco profitable?
Why is it that your neighbor on the plane likely has not paid the same price as you for his plane ticket?
Example: nightclub
Population: 100 men, each willing to pay 10$ 100 women, each willing to pay 5$
What should the club’s cover charge be? (MC = 0) If p = 10$, who will buy? π = ? If p = 5$, same questions.
How can the club do better?
A possible solution
Price discrimination (PD) :
Charge different people different prices for the same product.
Nightclub example:charge 5$ for women
charge 10$ for men
π = __________
Who can practice PD?
3 necessary conditions, on:the ability to choose your selling price
the information about potential customers
the customers’ ability to resell the product
Explain in detail.
Perfect PD (1st degree)
Def: Charge each consumer his willingness to pay
p
Q
D1
2
3
4
1 2 3 4
MC
Ex: Cupcake stand
MC ≡ $1.50 apiece (constant)
Who will buy a cupcake?
How much will each person pay?
What will profits be?
Ali
Ben
Cat
Dave
More generally, for a larger population.
p
D
SEx:
D : p = 40 - Q
S : MC = Q
How many units will be sold?
Compute CS, PS and W.
Compare with: - Competition
- Traditional Monopoly
40
40 Q
Perfect price discrimination (cont.)
Interpretations : Is perfect PD efficient?
Is it fair?
Is it realistic?
Give examples of markets approaching perfect price discrimination.
Perfect price discrimination (end)
Explicit market segmentation(3rd degree PD)
Def.: Consumers can be differentiated according to an observable characteristic
Examples : _________________________________
_________________________________
_________________________________
….
Example : Levi’s 501 jeans in Europe (E) and inNorth America. ( MC ≡ $5 apiece )
p
DE45
4500 QE
p
DNA35
7000 QNA
MC55
Explicit market segmentation (cont.)
What will the price be on each continent?
Give an interpretation in terms of price-elasticity?
Explicit market segmentation (end)
Def.: Consumers are discriminated according to an unobservable characteristic: their own preferences
Price menus, block pricing
Examples : _________________________________
_________________________________
_________________________________
….
Implicit market segmentation(2nd degree PD)
Example: Cell-phone plan (MC ≡ 10 ¢/mn) Plan 1: 200 mn for 40 $/month
Plan 2: 400 mn for 70 $/month
Plan 3: 600 mn for 90 $/month
Two types of consumers:
Type 1: q1 = 650 - 20p
Type 2: q2 = 550 - 20p
Which plan will each type of consumer choose?
Implicit market segmentation (cont.)
Type 1 Consumers
Chooses plan 2 b/c C > D
CS:
A+B+C-D
PS: E+H+F+G+I+J
Type 2 Consumers
Chooses plan 1 b/c G > H
CS:
A-B
PS: C+D+B+E+F
Monopoly pricing (no discr.)
What pricing schedule does this plan menu correspond to?
In other words, what is the per-minute price of the first 200mn?
What is the per-minute price of the next 200mn? (from 200 to 400)
What is the per-minute price for the last 200mn? (from 400 to 600)
p
Q
10
15
20
600400200
Draw the price « line »
Implicit market segmentation (cont.)
Type 1 consumer:
d1 : q1 = 650 – 20p
Which plan will she choose?
Why?
Show CS1 and PS1 graphically.
p
d1
25
Q
MC10
15
20
600400200
Implicit market segmentation (cont.)
30
Type 2 consumer:
d2 : q2 = 550 – 20p
Which plan will she choose?
Why?
Show CS2 and PS2 graphically.
p
d225
Q
MC10
15
20
600400200
Implicit market segmentation (cont.)
30
Exercise:
Consider a population of 100 consumers of each type
Compute the consumer surplus, producer surplus and total welfare for this entire population
Compare with the traditional monopoly. [Hint: First draw the demand curve of the entire population]
*Implicit market segmentation (end)
Conclusions
Several types of price discrimination:perfect (or 1st degree)
explicit segmentation (or 3rd degree PD)
implicit segmentation (or 2nd degree PD)
Price discrimination is everywhere! Look for more examples around you.
Next: Competition and strategic interactions