Price Discrimination: The Intuition Get those who will pay to pay Buyers with inelastic demand –They’re not scared off by high price –So charge them high.

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Presentation transcript:

Price Discrimination: The Intuition Get those who will pay to pay Buyers with inelastic demand –They’re not scared off by high price –So charge them high price Buyers with elastic demand –They buy lots at low price Does low price cover cost? –So charge them low price WARNING: Beware of Resale!

How to Price Discriminate: Let Us Count the Ways Demographics –Senior discounts –Military discounts –Student discounts –Kids eat free Time of Day, Week, Year –Matinee tickets –Airline pricing / Phone pricing –Weekday / weekend hotel rates Rack rate for “special” guests –Holiday travel WARNING: Beware of Resale!

How to Price Discriminate: Let Us Count the Ways Early Adopter Pricing –The Next New Thing –Hardcover/ softcover –End-of-season clearance Product Differentiation –Brand name / generics –Business / coach –Factory outlets WARNING: Beware of Resale!

How to Price Discriminate: Let Us Count the Ways Pricing Complements –Razors / Razor Blades –Polaroid Camera / Polaroid Film –Vegas Comps Buyers’ Clubs Coupons WARNING: Beware of Resale!

Price Discrimination: The Degrees Third Degree: Product Differentiation –Time of purchase –Place of purchase –Hardcover / softcover Second Degree: Non-Linear Pricing –Buyers’ clubs –Entry fee –Quantity discounts –Quantity premiums First Degree: Extract All Surplus –Tailored fees and discounts –Early adopter pricing –Complement pricing

Schemes to Get It All Set unit price equal to marginal cost –Buyer buys the most at this lowest possible price –Buyer gets maximum consumer surplus at this lowest possible price “Tax” away consumer surplus with an entry fee, F

Schemes to Get It All Imagine a buyer with a money-left-over utility function: U(x,m) = U(x) + m At buyer optimum: MU x /P x = MU m /P m = 1/1 = 1 Buyer will purchase x to point where MU x = P x Buyer’s MU x curve describes buyer’s demand P x Maximize Consumer Surplus Then “tax” it away! C.S P x * MC x

Getting It All Firm sets price to its marginal cost Firm can experiment with different fees, F –In business-to-business sales, “consumer surplus” is the buyer’s profit Buyer profit (at price equals seller’s marginal cost) can be estimated Different buyers (franchisees) can be charged different fees

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