bài giảng kinh tế vi mô tiếng anh ch12 pricing

1 Chapter 12 Pricing Key issues 1. why and how firms price discriminate 2. perfect price discrimination 3. quantity discrimination 4. multimarket price discrimination 5. two-part tariffs 6. tie-in sales Applications and problems 1.Broadway theaters 2.Providian tries to perfectly price discriminate 3.Amazon dynamic pricing 4.Coca Cola: Japan & U.S. 5.IBM requirement ties 6.eBay auctions Nonuniform pricing • prices vary across customers or units • noncompetitive firms use nonuniform pricing to increase profits Single-price firm • nondiscriminating firm faces a trade-off between charging • maximum price to consumers who really want good • low enough price that less enthusiastic customers still buy • as a result, single-price firm usually sets an intermediate price Price-discriminating firm • avoids this trade-off • earns a higher profit by charging • higher price to those willing to pay more than the uniform price: captures their consumer surplus • lower price to those not willing to pay as much as the uniform price: extra sales 2 Extreme examples of tradeoff • maximum customers will pay for a movie: • college students, $10 • senior citizens, $5 • theater holds all potential customers, so MC = 0 • no cost to showing the movie, so π = revenue Example 12.1a $200$100$100 Price discriminate $100$0$100Uniform, $10 $150$100$50Uniform, $5 Total Profit Profit from 20 Seniors Profit from 10 College Students Pricing Example 12.1b $125$25$100Price discriminate $100$0$100Uniform, $10 $75$25$50Uniform, $5 Total Profit Profit from 5 Seniors Profit from 10 College Students Pricing Broadway theaters increase their profits 5% by price discriminating rather than by setting uniform prices Geographic price discrimination • admission to Disneyland is $38 for out-of- state adults and $28 for southern Californians • tuition at New York’s Fordham University is $4,000 less for commuting first-year students than for others Successful price discrimination • requires that firm have market power • consumers have different demand elasticities, and firm can identify how consumers differ • firm must be able to prevent or limit resales to higher-price-paying customers by others 3 Preventing resales • resales are difficult or impossible when transaction costs are high • resales are impossible for most services Prevent resales by raising transaction costs • price-discriminating firms raise transaction costs to make resales difficult • applications: • U.C. Berkeley requires anyone with a student ticket to show a student picture ID • Nikon warranties cover only cameras sold in this country Prevent resales by vertically integrating • VI: participate in more than one successive stage of the production and distribution chain for a good or service • VI into the low-price purchasers Prevent resales by government intervention • governments require that milk producers charge higher price for fresh use than for processing (cheese, ice cream) and forbid resales • governments set tariffs limiting resales by making it expensive to import goods from lower-price countries • governments used trade laws to prevent sales of certain brand-name perfumes except by their manufacturers Flight of the Thunderbirds • 2002 production run of 25,000 new Thunderbirds included only 2,000 for Canada • potential buyers are besieging Ford dealers in Canada • many hope to make a quick profit by reselling these cars in the United States • reselling is relatively easy and shipping costs are relatively low • why ship a T-Bird south? • Ford is price discriminating between U.S. and Canadian customers • at the end of 2001, Canadians were paying $56,550 Cdn. (Thunderbird with the optional hardtop), while U.S. customers were spending up to $73,000 Cdn. Thunderbirds (cont.) • Canadian dealers try not to sell to buyers who will export the cars • dealers have signed an agreement with Ford that explicitly prohibits moving vehicles to the United States • dealers try to prevent resales because otherwise Ford may cut off their Thunderbirds or remove their dealership license • one dealer said, “It’s got to the point that if we haven’t sold you a car in the past, or we don’t otherwise know you, we’re not selling you one.” • nonetheless, many Thunderbirds were exported: eBay listed dozen of these cars on a typical day 4 3 types of price discrimination • perfect price discrimination (first-degree): sell each unit for the most each customer is willing to pay • quantity discrimination (second-degree): charges a different price for larger quantities than for smaller ones • multimarket price discrimination (third-degree): charge groups of customers different prices Perfect-price-discriminating monopoly • has market power • can prevent resales • knows how much each customer is willing to pay for each unit purchase (all knowing) All-knowing monopoly sells each unit at its reservation price • maximum price consumers will pay (captures all possible consumer surplus) • height of demand curve • MR is the same as its price (AR) Figure 12.1 Perfect Price Discrimination p, $ per unit 6 5 4 3 2 1 Q, Units per day 6543210 MC e Demand, Marginal revenue MR 1 = $6 MR 2 = $5 MR 3 = $4 Perfect price discrimination properties • perfect price discrimination is efficient • competition and a perfectly discriminating monopoly • sell the same quantity • maximize total welfare: W = CS + PS • have no deadweight loss • consumers worse off (CS = 0) than with competition s c d p, $ per unit E D C B A Q, Units per dayQQ= Q MC s Demand, MR MR s p c = MC c e c e s p s p 1 MC 1 MC d 5 Providian Bancorp • sends middle- and lower-income consumers who need to borrow substantial sums of money fliers that offer “the lowest interest rate” • when a customer calls, an employee uses a computer model and the individual's credit history to negotiate a customized (high) interest rate, credit line, and other terms Doctors perfectly price discriminate • “selfless” doctor charges poor patients less: charitable or price discriminating? • many doctors ask patients where they live, what’s their job, and other non-medical questions • answers help doctor estimates patient’s earnings/wealth and hence willingness to pay Amazon • in 2000, Amazon revealed that it used “dynamic pricing”: gauges shopper’s desire and means, charges accordingly • example • a man ordered DVD of Julie Taymor’s “Titus” at $24.49 • checks back next week and finds price is $26.24 • removes cookie: price fell to $22.74 • after newspaper articles, Amazon announced it had dropped this policy Botox revisited • how much more would Allergan earn from Botox if it could perfectly price discriminate? Application Botox Revisited p , $ per vial 1.30 2.612.75 A ≈ $187.5 million C≈ $187.5 million B ≈$375 million Demand Q, Million daily doses of Botox 75.0 7.5 0 e s e MC MR 143.0 c Solved problem How does welfare change if firm in Table 12.1 goes from charging a single price to perfectly price discriminating? 6 Table 12.1a $200$100$100 Price discriminate $100$0$100Uniform, $10 $150$100$50Uniform, $5 Total Profit Profit from 20 Seniors Profit from 10 College Students Pricing Answer: Panel a • welfare is same with single price or price discrimination because output unchanged • single price: if theater sets a single price of $5 • it sells 30 tickets and π = $150 • 20 seniors pay their reservation price so CS = 0 • 10 college students (reservation prices of $10) have CS = $50 • welfare = $200 = profit ($150) + consumer surplus ($50) If firm perfectly price discriminates • it charges all customers their reservation price so there’s no consumer surplus • seniors pay $5 and college students, $10 • firm's profit rises to $200 • welfare W = $200 = profit ($200) + CS ($0) is same under both pricing systems where output stays the same Table 12.1b $125$25$100Price discriminate $100$0$100Uniform, $10 $75$25$50Uniform, $5 Total Profit Profit from 5 Seniors Profit from 10 College Students Pricing Answer: Panel b • welfare is greater with perfect price discrimination where output increases • if theater sets single price of $10 • only college students attend and have CS = 0 • π = $100 • W = $100 • if it perfectly price discriminates: • CS = 0 • π =$125 • W = $125 Quantity discrimination • firm does not know which customers have highest reservation prices • firm might know most customers are willing to pay more for first unit (demand slopes down) • firm varies price each customer pays with number of units customer buys • price varies only with quantity: all customers pay the same price for a given quantity • note: not all quantity discounts are a form of price discrimination 7 Utility block pricing • public utility (electricity, water, gas…) charges • one price for the first few units (a block) of usage • different price for subsequent blocks • both declining-block and increasing-block pricing are common p 1 , $ per unit 30 50 70 90 Q, Units per day 20 40 900 m (a) Quantity Discrimination Demand A = $200 C = $200 B = $1,200 D = $200 p 2 , $ per unit 30 60 90 Q, Units per day 30 900 m (b) Single-Price Monopoly Demand F = $900 G = $450 MR E = $450 Figure 12.3 Quantity Discrimination Multimarket price discrimination • firm knows only which groups of customers are likely to have higher reservation prices than others • firm divides potential customers into two or more groups • firms set a different price for each group Theater • senior citizens pay a lower price than younger adults at movie theaters • by admitting people as soon as they demonstrate their age and buy tickets, theater prevents resales International price discrimination: Cars • even including shipping and customs, European price for BMW 750IL • price is 13.6% more from an American firm than imported from Europe International price discrimination: Software • Australia's Prices Surveillance Agency criticized American software industry for charging Australians 49% more than Americans, • then, Agency called for an end to import restrictions so that Australian retailers could import software directly 8 Price discriminating: 2 groups • marginal cost = m • monopoly charges Group i members p i for Q i units • profit from Group i is π i = p i Q i –mQ i To maximize total profit • monopoly sets its quantities so that marginal revenue for each group i, MR i , equals common marginal cost, m: MR 1 = m = MR 2 . • example: Sony’s Aibo robot dog p J , $ per unit Q J , Units per year DWL J D J CS J π J MR J p J = 2,000 500 3,500 0 MC Q J = 3,000 7,000 (a) Japan Figure 12.4 Multimarket Pricing of Aibo p US , $ per unit Q US , Units per year DWL US D US CS US π US MR US p US = 2,500 500 4,500 0 MC Q US = 2,000 4,500 (b) United States Profit-maximizing condition • MR i = p i (1 + 1/ε i ), so • MR 1 =p 1 (1 + 1/ε 1 ) = m = p 2 (1 + 1/ε 2 ) = MR 2 2 1 2 1 1 1 . 1 1 p p ε ε  +   ⇒ =  +   Solved problem • monopoly sells in two markets • constant elasticity of demand is • ε 1 = -2 in first market • ε 2 = -4 in second market • MC = $1 • resales are impossible • what prices should monopoly charge? Answer ⇒ p 1 = 1/(1 – ½) = 2 p 2 = 1/(1 – ¼) = 4/3 p 1 /p 2 = 2/(4/3) = 1.5 1 11 i i pMC ε  += =   1 1/ 1 i i p ε  =+   9 Coca-Cola Version 1 • a two-liter bottle of Coke costs 50% more in the U.K. than in EU nations (SF Chronicle, May 17, 2000: D2) • if Coke’s marginal cost is the same for all European nations, how does the demand in the U.K. differ from that in the EU? Answer • p UK /p EU = 1.5 • an example that is consistent with this ratio is ε UK = - 2 and ε EU = -4 • generally: or 1.5ε EU - ε UK = 0.5 ε UK ε EU 11 1/1 1.5 EU UK εε  ++=   Coca-Cola Version 2 • Japanese consumers can buy U.S made or Japanese-made Coke (identical except for packaging) • wholesale prices: m US = $11.50, m J = $20.00 • retail prices: p US = $18.30, p J = $27.40 • what are the elasticities? Answer • (note: example of product differentiation rather than price discrimination) • p(1 + 1/ε) = m, or ε = 1/(m/p –1) • Japanese-made Coke: ε J = 1/(20/27.40-1) = -3.703 • American-made Coke: ε US = 1/(11.50/18.30-1) = -2.691 Generics and brand-name loyalty Why do prices of some brand-name pharmaceutical drugs rise when equivalent, generic brands enter the market? Entry of generics • generics enter when patent for profitable drug expires • generics: 40% of U.S. pharmaceutical sales by volume • name-brand drugs with sales of about $20 billion went off patent by 1997 • most states allow/require pharmacist to switch prescription from more expensive brand-name product to generic unless doctor or patient object 10 Price effects 18 major orally-administered drug products that faced generic competition 1983-1987 • on average for each drug, 17 generic brands entered and captured 35% of total sales in first year • price effects • brand-name drug prices rose an average of 7% • but average market price fell over 10% • because generic price was only 46% of brand-name price Explanation • customers with different demand elasticities • some are price sensitive: willingly switch to less expensive generic drugs • others are unwilling to change brands • AARP survey found that people 65 and older are 15% less likely than people 45 to 64 to request generic versions of a drug from their doctor or pharmacist • introduction of generics makes demand facing brand-name drug less elastic Identifying an individual’s group • identify using observable characteristics of consumers price elasticities • identify consumers based on their actions: consumers self-select into a group Why firms use self-identification • each price discrimination method requires that, to receive a discount, consumers incur some cost, such as their time • otherwise, all consumers would get a discount • by spending extra time to obtain a discount, price-sensitive consumers differentiate themselves from others Getting consumers to identify themselves: Coupons • self-selection: people who spend their time clipping coupons buy goods at lower prices than those who value their time more • coupon-using consumers paid $24 billion less than other consumers in the first half of 1990s Airline tickets and hotel rooms • self-selection (business vs. vacation travelers): cheap fares require advanced purchase and staying over a Saturday night • Sheraton and other hotel chains offer discounts for rooms booked 14 days in advance for the same reason [...]... prohibited by the Supreme Court from using certain tie-in sales in 1992 • Kodak sells photocopiers and Kodak parts and service to its customers • Kodak refused to supply some parts to independent repair firms - effectively forcing customers to buy those parts and associated service from Kodak • eBay conducts auctions on millions of items • usually, a seller sets a minimum bid and then buyers submit... • if a new bidder places a bid > current highest bid, then new highest bid listed on eBay’s computer is the previous highest bid plus an increment (50¢ for low-price items) Charge and response Winner • company was charged with illegally tying sale of its photocopiers with its parts and service • Kodak argued that • case should be dismissed because both sides agreed Kodak faced substantial competition... estimates set the figure at $100,000) a year with benefits and other perks worth about $42,000 under the previous contract • Traditionally, longshore unions offered employers a take-it-or-leave-it choice: • union specified both a wage and a minimum number of hours of work that the employers had to provide • 1975 U.S Department of Labor study found 2/3 of transportation union contracts (excluding railroads... 8090100 q2, Units per day 13 2 forms of tie-in sales • requirements tie-in sale: customers who buy one product from a firm must purchase all units of another product from that firm (copiers/toner or service) • bundling (or a package tie-in sale): two goods are combined so that customers cannot buy either good separately (shoes/shoelaces) Bundling • bundling allows firms that can't directly price discriminate... other customers value other good less • here, bundling pays only if customers willing to pay relatively more for regular-season tickets are not willing to pay as much as others for preseason tickets and vice versa Supreme Court rejects Kodak • consumers may be uninformed (can’t forecast repair cost) • even if Kodak lacks market power in photocopiers, it’s a monopoly supplier of its unique repair parts...Reverse Auctions • priceline.com uses a name-your-own-price or reverse-auction to identify price sensitive customers • a customer enters a relatively low price bid for a good or service, such as airline tickets • merchants decide whether to accept that bid or not Gray markets • producers of recordings, books, sunglasses, and shampoo, price discriminate by selling these goods for... right to sell copyrighted U.S goods in U.S once sold, "lawfully made" copies can be resold without the permission of copyright holder reduces firms ability to price discriminate Other forms of nonlinear pricing • two-part tariffs • tie-in sales both are second-degree price discrimination schemes where the average price per unit varies with the number of units consumers buy 11 Two-part tariff • firm charges... dismissed because both sides agreed Kodak faced substantial competition in initial sale of photocopiers • customers would not buy from Kodak if they knew that they would be overcharged on repair parts and service • because Kodak didn't have market power in copier market, it couldn't price discriminate or extend its market power to another market • eBay auction allocates good to highest bidder at a price equal... price discriminate a firm needs • market power • to know which customers will pay more for each unit of output • to prevent resales • firm earns a higher profit from price discrimination than uniform pricing because it • captures some or all of the CS of customers who are willing to pay more than uniform price • sells to some people who won’t buy at uniform price 2 Perfect price discrimination • to... by using a tie-in sale: customers can buy one product only if they also purchase another one • requirement tie-in sale: customers who buy one good must make all of their purchases of another good or service from that firm • bundling (package tie-in sale): firm sells only a bundle of two goods together • prices differ across customers under both types of tie-in sales 4 Multimarket price discrimination . problems 1.Broadway theaters 2.Providian tries to perfectly price discriminate 3.Amazon dynamic pricing 4.Coca Cola: Japan & U.S. 5.IBM requirement ties 6.eBay auctions Nonuniform pricing • prices vary. resales by vertically integrating • VI: participate in more than one successive stage of the production and distribution chain for a good or service • VI into the low-price purchasers Prevent. dropped this policy Botox revisited • how much more would Allergan earn from Botox if it could perfectly price discriminate? Application Botox Revisited p , $ per vial 1.30 2.612.75 A ≈ $187.5 million C≈