Commercial Speech Sales, promotion, advertising, warranties, and brands create value by providing information, thereby reducing transaction costs

Transaction costs Search costs -- cost of obtaining knowledge of the PRODUCT including the consequences of its use and its alternatives Bargaining costs -- cost of arriving at a mutually satisfactory EXCHANGE Monitoring and enforcement costs -- cost of insuring compliance with AGREEMENT

Varieties of commercial speech Sales Promotion Advertising Warranties Brands

Commercial speech’s down side Sales, promotion, advertising, and brands REDUCE VALUE when they provide MISINFORMATION –Protect honest commercial speech –Prohibit false commercial speech

The effect of Transaction Costs and the Benefits of Advertising

Three cases Zero transactions costs Total transaction costs Marginal transactions costs

Payoff to commercial speech Social benefits of advertising will depend upon both supply and demand for product Many close substitutes, many undifferentiated products, low social payoff Few close substitutes, differentiated products, high social payoff Also where payoff to the firm is HIGHEST

Anti-Trust Predation Price discrimination

At least two consumer segments exist Firm can identify consumers in each group, and set prices differently Firm must be able to prevent consumers in one group from selling to consumers in the other (no arbitrage).

1st degree price discrimination

3rd degree price discrimination

3rd degree price discrimination through time

Multi-part or nonlinear pricing I Two-part tariffs can be used as means of 1st degree price discrimination to extract the full consumer surplus from the customer. How does this work? –Lump sum service charge, equal to or less than the full consumer surplus at optimal output levels; –Volume charge based on marginal cost. –You need full information as to the demand schedule of each customer/market segment.

Multi-part or nonlinear pricing II More often, multipart tariffs are used as a means of practicing third-degree price discrimination. This also requires considerable information about consumer tastes and preferences. One of the beauties of two-part tariffs is that they can be used to OBTAIN knowledge about consumer tastes and preferences by designing price structures that lead consumers to self-select themselves into classes Example: Restaurants: buffet, price-fixe, a la carte

Multi-part or nonlinear pricing II