Today The ice cream problem Market Demand Curves

Recall Utility Marginal Utility Utility Maximization Consumer’s surplus

Or, how to get the most out your customers. The Ice Cream Problem Or, how to get the most out your customers.

Pricing Multiple Units So far, we have assumed that the price per unit is fixed. But stores often charge a lower average price when you buy more. Why? May cost stores less to sell in large quantity. May be a way to get more revenue.

The Way Ice Cream Isn’t Priced Store charges 60 cents per scoop. Cust. buys 3 scoops. Revenue = 3@0.60 = $1.80. Where is CS? cents/scoop 90 75 60 D 1 2 # scoops 3 4

The Way Ice Cream Is Priced Ice Cream Cones or Cups 1 scoop $0.90 2 scoops 1.65 3 scoops 2.25 each add’l scoop 0.60

The Way Ice Cream Is Priced Ice Cream Cones or Cups 1 scoop $0.90 2 scoops 1.65 3 scoops 2.25 each add’l scoop 0.60 Marg. Cost to Buyer $0.90 0.75 0.60 0.60 thereafter

The Way Ice Cream Is Priced How much will this buyer order? How much revenue will the seller get? How much has revenue increased (compared to 60 cents each)? How much is CS now? cents/scoop 90 75 60 D 1 2 3 4 # scoops

Price Discrimination If this is price discrimination. sellers charge different prices depending on the quantity purchased AND the price differences do not reflect lower costs to the seller, this is price discrimination.

Price Discrimination Price discrimination is a way for sellers to get revenue at the expense of consumers. Why don’t all sellers do this? Competition from other sellers. Don’t know what demand looks like. If wrong, could lose sales. Must be able to prevent re-sale.

From Individual Demand To Market Demand

Market Demand Market demand shows, at every price, the sum of the quantities demanded by all households in the market. It is the horizontal summation of the household demand curves.

Deriving Market Demand P P P Jane Market John 3 2 1 d d D 5 22 7 15 q 5 22 37 Q 15 15

Coming Up Begin in-depth study of supply, Chapter 20.

Group Work Pricing at the Health Club

Manager at Health Club-Assumptions All of your customers have identical individual demand curves for weekly visits to the club (shown later). The cost to the club of extra customer visits is so low it can be ignored, so your goal is to maximize revenue.

Helpful geometry hints The area of a right triangle is equal to ½ of the area of the corresponding rectangle. For some of the calculations, you will want to add the area of a triangle to the area of a rectangle in order to get the area of a particular trapezoid.

Individual Demand for Health Club Visits per Week Price/Visit Consider 3 types of pricing schemes $6 D Visits/week 6

Pricing Scheme A: Fixed price per visit Price/Visit What price would you charge per visit? Hint: you can use price elasticity of demand. How times a week will each customer visit? How much revenue will you earn? What is consumer’s surplus? $6 D Visits/week 6

Scheme B: You offer a weekly pass, good for up to 3 visits. Price/Visit What price would you charge for the weekly pass? How times a week will each customer visit? How much revenue will you earn? What is consumer’s surplus? $6 D Visits/week 6

Scheme C: You offer a weekly pass good for unlimited visits. Price/Visit What price would you charge for the weekly pass? How times a week will each customer visit? How much revenue will you earn? What is consumer’s surplus? $6 D Visits/week 6

Basic Questions What scheme benefits the health club the most? What scheme gives the most consumer’s surplus? Does this confirm or refute what we learned about price discrimination?

Use of Price Discrimination & Knowledge of Demand If you don’t know your customers’ demand very well, you might decide to offer them an unlimited-visit pass for $20 per week. Briefly explain why is this a mistake. (Assume no other price plans are offered.)

Preventing Re-sale We also learned that a seller “must be able to prevent re-sale” in order to successfully practice price discrimination. How might you accomplish this in your health club if you decide to use pricing plan B or C?