Chapter 14 - Advanced pricing techniques. In this chapter we have looked at a lot of special situations for which pricing decisions are more complicated than for the simple firm that we studied in the first four parts of this text. We showed you why uniform pricing does not maximize the total revenue a pricesetting firm can collect from consumers. | Chapter 14: Advanced Pricing Techniques McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Advanced Pricing Techniques Price discrimination Multiple products Cost-plus pricing Capturing Consumer Surplus Uniform pricing Charging the same price for every unit of the product Price discrimination More profitable alternative to uniform pricing Market conditions must allow this practice to be profitably executed Technique of charging different prices for the same product Used to capture consumer surplus (turning consumer surplus into profit) The Trouble with Uniform Pricing (Figure ) Price Discrimination Exists when the price-to-marginal cost ratio differs between two markets Three conditions necessary to practice price discrimination profitably: Firm must possess some degree of market power A cost-effective means of preventing resale between lower- and higher-price buyers (consumer arbitrage) must be implemented Price elasticities | Chapter 14: Advanced Pricing Techniques McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Advanced Pricing Techniques Price discrimination Multiple products Cost-plus pricing Capturing Consumer Surplus Uniform pricing Charging the same price for every unit of the product Price discrimination More profitable alternative to uniform pricing Market conditions must allow this practice to be profitably executed Technique of charging different prices for the same product Used to capture consumer surplus (turning consumer surplus into profit) The Trouble with Uniform Pricing (Figure ) Price Discrimination Exists when the price-to-marginal cost ratio differs between two markets Three conditions necessary to practice price discrimination profitably: Firm must possess some degree of market power A cost-effective means of preventing resale between lower- and higher-price buyers (consumer arbitrage) must be implemented Price elasticities must differ between individual buyers or groups of buyers Price Discrimination First-Degree (Perfect) Price Discrimination Every unit is sold for the maximum price each consumer is willing to pay Allows the firm to capture entire consumer surplus Difficulties Requires precise knowledge about every buyer’s demand for the good Seller must negotiate a different price for every unit sold to every buyer First-Degree (Perfect) Price Discrimination (Figure ) Second-Degree Price Discrimination Lower prices are offered for larger quantities and buyers can self-select the price by choosing how much to buy When the same consumer buys more than one unit of a good or service at a time, the marginal value placed on additional units declines as more units are consumed Examples of Second Degree Price Discrimination Two-part pricing Block pricing 14- Second-Degree Price Discrimination Two-part pricing Charges buyers a fixed access charge (A) to purchase as many units as they .
