Where are we? Firms are price-takers Firms have market power - - PowerPoint PPT Presentation

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Where are we? Firms are price-takers Firms have market power - - PowerPoint PPT Presentation

Oct 15, 2022 17 likes •277 views

Where are we? Firms are price-takers Firms have market power (Perfect competition) (Imperfect competition) (Sessions 16) Individual Equilibrium decisions Pricing Game theory (Sessions 711) (Sessions 1215) Session 11

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SLIDE 1

Where are we?

(Sessions 1–6)

Firms are price-takers (Perfect competition) Firms have market power (Imperfect competition) “Pricing”

(Sessions 7–11)

Individual decisions “Game theory”

(Sessions 12–15)

Equilibrium

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 1

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SLIDE 2

The Conundrum

from basic pricing, Topics 8 & 9

5 10 15 20 25 20 40 60 80 100 120 140 160

Q $ d(P) mc(Q) Cost Profit Consumer surplus Deadweight loss Pπ Qπ

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 2

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SLIDE 3

What would it take to generate and extract all gains from trade?

Case of unit demand

5 10 15 20 25 20 40 60 80 100 120 140 160

Q € d(P) mc(Q)

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 3

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SLIDE 4

More realistic price discrimination

Perfect price discrimination is a useful benchmark, but is never attainable. However: The informational and other constraints that make PPD impossible should not lead you to revert to uniform pricing. There may be

  • ther feasible pricing schemes that partially achieve the goals of PPD.

For example:

  • Session 10: Weaker form of explicit price discrimination:

Differentiated pricing across coarsely divided market segments.

  • Session 11: Various means of implicit price discrimination (screening).

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 4

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SLIDE 5

Pricing with Market Power

Pricing

(Sessions 7–9)

Uniform Price discrimination

(Session 10)

Explicit

(Sessions 11)

Implicit

Explicit: Customers have different trading opportunities. Implicit: Same trading opportunities, just different decisions.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 5

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SLIDE 6

Explicit or implicit?

1.

Explicit

Child, student, and senior-citizen discounts. 2.

Implicit

  • Diff. airline prices (for coach seats) for business and leisure travelers.

3.

Explicit

Different prices for medicine in different countries or for different uses. 4.

Explicit

Different utility rates for residential and business customers. 5.

Implicit

Different phone plans for high-usage and low-usage customers. 6.

Implicit

Higher prices when a product is first introduced (e.g., books).

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 6

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SLIDE 7

As told to me by a Dec’08 student …

… who prior to INSEAD managed a 5-star hotel in China. A normal 5-star hotel has from 20 to 50 prices, decided by weekday or weekend, room type, view from the room, with/without extra service such as breakfast, peak holiday season, type of guest (walk-in, group, corporate), nationality (on average Japanese groups pays more than Chinese groups). However, most of time, prices depend on the “rack rate” (the maximum charge) because other prices follow simple mathematical calculation (e.g. add 15 dollars for breakfast, groups are 80% of rack rate on weekend, and 70% on weekday…).

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 7

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SLIDE 8

Some cases

  • 1. Non-linear pricing (not covered, but see Chapter 11B if interested)
  • 2. Product differentiation (today)
  • 3. Bundling (today)

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 8

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SLIDE 9

Screening with differentiated products

Scenario: Airline has B business customers and L leisure customers. Type of Valuation customer Unrestricted Restricted

Make sure everyon understands this d

Business €1000 €700 Leisure €600 €550 Constant MC = €300 CONSTANT MARGINAL COST = €300 PER TICKET (Same for unrestricted and restricted tix.)

Explain: This highlights d based differences as oppo to cost-based differences

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 9

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SLIDE 10

Perfect price discrimination

FPM

  • Ex. 11.2

Type of Valuation customer Unrestricted Restricted

Make sure eve understands t

Business €1000 €700 Leisure €600 €550 Constant MC = €300

PB = 1000 PL = 600

Profit = 700 B + 300 L

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 10

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SLIDE 11

Uniform Pricing

FPM

  • Ex. 11.1

Type of Valuation customer Unrestricted Restricted

Make sure eve understands t

Business €1000 €700 Leisure €600 €550 Constant MC = €300

Say: “A particularly simple monopoly-pricing problem.”

Charge either: 1000 to sell to business customers

⇒ Profit = 700B

600 to sell to everybody

⇒ Profit = 300(B + L)

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 11

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SLIDE 12

Screening with restricted & unrestricted tix

Like FPM

  • Ex. 11.3

Type of Valuation customer Unrestricted Restricted

Make sure eve understands t

Business €1000 €700 Leisure €600 €550 Constant MC = €300

SELL: Restricted tix to leisure travelers for PR = 550.

  • Unrest. tix to business travelers for PU = 850.

⇒ Profit = 250L + 550B

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 12

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SLIDE 13

Comparison of 3 options

Like FPM

  • Ex. 11.4

(A) sell only unrestricted tickets for 1000 to business travelers; Profit:

700 B

(B) sell only unrestricted tickets for

600

to all travelers; Profit:

300 (L+B)

(C) sell unrestricted tickets to business travelers for

850

and restricted tickets to leisure travelers for

550

. Profit:

250 L + 550B

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 13

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SLIDE 14

Comparison of 3 options

Like FPM

  • Ex. 11.4

100 200 300 400 500 600 10 20 30 40 50 60 70 80 90

Profit % Bus. travelers ( B ) C B A B best C best A best

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 14

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SLIDE 15

Different design of restricted tix

Type of Valuation customer Unrestricted Restricted

Make sure eve understands t

Business €1000 €700 Leisure €600 €550 Constant MC = €300

Type of Valuation customer Unrestricted Restricted

Make sure everyon understands this d

Business €1000 €600 Leisure €600 €500 Constant MC = €300 (D) sell unrestricted tickets to business travelers for

900

and restricted tickets to leisure travelers for

500

. Profit:

200 L + 600B

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 15

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SLIDE 16

Comparison of 4 options

100 200 300 400 500 600 10 20 30 40 50 60 70 80 90

Profit % Bus. travelers ( B ) C B D A B best C best A best D best

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 16

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SLIDE 17

Explicit or implicit price discrimination?

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 17

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SLIDE 18

Exercise 11.5 – Bundling

Pricing of a two-concert mini season (Wagner and Harbison) at a theater. Highly segmented market, with only three types of customers: Type of Valuation customer Wagner Harbison A 50 5 B 40 40 C 5 50 A customer may go to one or both of the concerts.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 18

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SLIDE 19
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Perfect price discrimination

Type of Valuation customer Wagner Harbison A 50 5 B 40 40 C 5 50

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 19

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SLIDE 21

No bundling

Type of Valuation customer Wagner Harbison A 50 5 B 40 40 C 5 50

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 20

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SLIDE 22

Pure bundling

Type of Valuation customer Wagner Harbison A 50 5 B 40 40 C 5 50

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 21

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SLIDE 23

Mixed bundling

Type of Valuation customer Wagner Harbison A 50 5 B 40 40 C 5 50

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 22

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SLIDE 24

Bottom line

Even if you cannot explicitly segment market (due to lack of observability or to legal restrictions) do not ignore the composition of your market! Construct menus of deals thinking about what each type of customer will choose.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 23

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SLIDE 25

Price discrimination: Session 10 (Thurs), Session 11 (Today)

Topic 10 – Explicit Price Discrimination

Called 3rd-Degree Price Discimination in most texts

  • 1. What? When? How?
  • 2. Bottom line: Charge higher price to segment with less elastic demand.

Topic 11 – Implicit Price Discrimination (Screening)

Not covered by most (any?) texts

  • 1. Perfect price discrimination (benchmark)
  • 2. Screening via differentiated products
  • 3. Bundling

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 24

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SLIDE 26

Coming next …

(Sessions 1–6)

Firms are price-takers (Perfect competition) Firms have market power (Imperfect competition) “Pricing”

(Sessions 7–11)

Individual decisions “Game theory”

(Sessions 12–15)

Equilibrium

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 11 • Screening Slide 25