1. Price Discrimination

2. Price Discrimination Is Common Is Price Discrimination Bad?
Tying and Bundling
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4. ¿Qué Pasa?

5. Price Discrimination Students Get 10% Off! 55+ Discount
From the Slate online: L.A. Boutique Opens Only When It Wants To
In a hurry to find that perfect Christmas present? Then don't go to the Never Open Store, an L.A. boutique where the owner sets her hours—and her prices—based on what kind of mood she's in. The Never Open Store doesn't have official hours. The hands have been ripped off the miniature "Will Return At ..." clock on the front door, and owner Stephanie Mata lets people in when she wants to. None of the funky clothing or art is priced, either. Mata says she knows it's "unethical," but she sizes people up and names a price that she thinks fits the client. Hollywood set designers with lavish budgets will pay more for the syringe-studded dartboard or recycled chandelier than students looking to decorate their first apartment. In an era of consumer belt-tightening and retail door-shutting (the Never Open Store is on a street with lots of vacant storefronts), the unorthodox strategy seems to be working. Mata has created a buzz, and she's won't be changing the way she operates. "I'm the boss," Mata says. "And I don't like bad vibes."
Read original story in The Los Angeles Times | Saturday, Dec. 12, 2009
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6. Is it right for consumers to face different prices based on their age?
Yes No
No right answer…. Just a stepping stone for discussion.
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7. A New York politician has suggested making gasoline “Zone Pricing” (price discrimination) illegal. (1 minute)
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8. more $$$ Price Discrimination
Price Discrimination = selling the same product at different prices to different customers.
Why? To increase profit.
Profit will be greater with price discrimination than without.
more
$$$
normal price
$ student discount

10. Who probably has more elastic demand for a Hertz rental car: Someone who reserves a car online weeks before a trip, or someone who walks up to a Hertz counter after he walks off an airplane after a 4-hour flight? Who probably gets charged more?
The person at the counter has a more elastic demand and will be charged less.
The person at the counter has a more elastic demand and will be charged more.
The person who booked in advance has a more elastic demand and will be charged more.
The person who booked in advance has a more elastic demand and will be charged less.
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11. Price Discrimination and Profit Maximization
Recall the profit-maximizing rule for firms with Monopoly power:
produce the Quantity where MR = MC
based on that Quantity, charge as much as the market will bear (found by the position of the demand curve)
But what if you sell to more than one market, each with its own demand curve?
E.g. senior citizens and young people, business travelers and leisure travelers.

12. Can you spot who is willing to pay the most for an airplane ticket?

13. Do you expect prices to be higher or lower near the pirate dens in Somalia?
Pirates pay $5 for a shoeshine, everyone else $.50. Full article here
Pirate payoffs feed big-money lifestyle in Somalia
Posted on December 6, 2009 at 10:43 AM
******
BOSSASO, Somalia (AP) — A parcel of land here that sold for $12,000 two years ago now costs more than $20,000. The price of a nice pair of men's shoes has gone up from $20 to $50.
The reason: pirates.
The influx of millions of dollars in ransoms has changed life in this coastal Muslim community, driving prices up and creating a schism between the pirate haves and have-nots. As piracy ramps up again with the end of the monsoon season, the lifestyle of the pirates — big houses, fast cars and easy drugs — is decried by both religious leaders and ordinary villagers.
"The use of drugs such as cannabis and the drinking of alcohol, sex and other obnoxious misconduct are now becoming common within the pirates, causing social problems," said Sheikh Ahmed, a mosque leader in the town of Galkayo. "That is what is worrying us, a lot more than the risk they pose to the foreign ships and crew."
Just last month, pirates were paid a reported $3.3 million to release 36 crew members from a Spanish vessel held hostage for more than six weeks. Pirates stand to make tens of thousands from the payment, money that will pulse through the community in gifs, lan ad ayens o amly fiedsan bsiesme.
The Eurpean Union Naval Force says pirates now hold 11 ships and 264 crew members hostage off the coast of Somalia. There is little doubt that more ransom money is coming.
"There is mad money circulating here, and it affects everybody — directly or indirectly," said Haji Said, a hotel owner.
A lone paved road passes through the middle of Bossaso, and hotels, businesses and new construction line its sides. SUVs and luxury vehicles from Asia ply the road with American, Somali and Indian music blasting from within.
The price of clothes, shoes and cosmetics is climbing, said Anshur Kamil, a businessman. Pirates don't even have to pay upfront. Those holding ships hostage that haven't yet received ransom can buy goods on credit — at elevated prices — and settle up their debts when the ransom money comes in, villagers say.
The pirates pay in dollars and don't bother to haggle, said Khadra Abdullahi, a shop owner in Bossaso, a coastal town on the northern edge of Somalia across the Gulf of Aden from Yemen. "Sometimes they leave change behind, which shows that money is nothing to them."
When villagers think the price of a cosmetic is too high, their reply is "we are not pirates," said Abdullahi.
The closer to the pirate dens one gets, the higher the prices go. In the nearby town of Eyl, a cup of tea costs three times as much as in Bossaso. In Eyl, pirates pay $5 for a shoeshine, compared with 50 cents in Bossaso, said Hashim Salad, a store owner.
Two years ago, a teen named Adani lived on the streets of Bossaso. Now, t nl 1 yar od,heisa irtean onsa ig hus ad are ruk. He says he has taken part in two hijackings that earned him $75,000, and plans to take part in one more high-seas heist.
"When you have nothing people despise you and if they see that you have money you will be respected," said Adani, who gave only one name for fear of reprisals. "This next job will be my last in the piracy trade. I know it's a big risk but I believe in gambling. If I win, I will get married and give up piracy."
Roger Middleton, a piracy expert at the London-based think tank Chatham House, said the average ransom has risen from roughly $1 million last year to $2 million this year. He said pirates have been paid more than $100 million in the last two years, though he stressed that the number was an estimate only, and no one has hard figures.
"I'm sure there's some resentment at the way pirates behave and the lifestyle they lead. It's not a traditional or righteous one," Middleton said.
Middleton also noted that pirate foot soldiers make not millions, but tens of thousands over a year. The big money goes to the bosses, he said, and they are likely to spend it overseas or invest it.
Clerics and village elders say they don't approve of the pirate lifestyle. Teenagers threaten their parents that they will join the pirates if they don't get their way, said a prominent Bossaso elder, Suldan Mohamud Aw-nor.
Marriage has also been affected by pirates with pockets full of cash. Hundreds of cars escort the bride and groom to the reception, where the house is crammed with expensive furniture, and the bride wersexeniv gldjeely,sad hasoAhed te wnr f eauty saon. Thousands of dollars are paid to brides' families as a dowry.
"Pirates do not waste time to woo women, but instead pay them a lot," said Sahro Mohamed. "They did this to several girls I know."
___
Associated Press writer Jason Straziuso in Nairobi contributed to this report.

14. Why Profits Increase with Price Discrimination
Consider two demand curves- AIDs drugs in Africa and Europe Setting a single “world price” (assume the average of the two markets) will necessarily reduce profits.
Europe
Africa
Price Q MR
MC=AC D
QEurope
QAfrica
PEurope
PAfrica
Profit
PWorld

15. The Principles of Price Discrimination
1a. If the demand curves are different, it is more profitable to set different prices in different markets than a single price that covers all markets. (e.g. the firm wants to set different prices) 1b. To maximize profits the monopolist should set a higher price in markets with more inelastic demand. 2. Arbitrage makes it difficult for a firm to set different prices in different markets, thereby reducing the profit from price discrimination. (e.g. the firm may not be able to set different prices)

16. What price should the monopolist charge in Market A? $5 $10 $7
Any price higher than $10
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17. Coupon users have elastic demand and non-users have inelastic demand.
A dry cleaner has a sign in its window: “Free internet coupons.” The dry cleaner lists its website, and indeed there are good discounts available with the coupons. Most customers don't use the coupons. What is probably the main difference between customers who use the coupons and those who don’t?
Coupon users have elastic demand and non-users have inelastic demand.
Coupon users have inelastic demand and non-users have elastic demand.
Coupon users have perfectly inelastic demand and non-users have perfectly elastic demand.
Coupon users have a higher value of their own time than the non-users use the coupons.
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18. Arbitrage
Arbitrage is taking advantage of price differences for the same good in different markets by buying low in one market and selling high in another market.
E.g. smuggling cheap AIDs drugs out of Africa for resale in Europe

19. Arbitrage makes it easier for a firm to set different prices in different markets.
True
False
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20. Think of a good someone should invent. How would you price discriminate? How would you prevent arbitrage?

21. Firms develop arbitrage-discouraging techniques
Preventing Arbitrage
Firms develop arbitrage-discouraging techniques
Red AIDs pills in Africa, White in Europe
Injecting arsenic into cheap industrial plastics to prevent it from being pirated into the denture industry (proposed but not practiced!)
Poisoning ethanol to keep it from being converted to drinkable alcohol
Coding DVDs so cheaper Indian DVDs won’t play in US players.

22. Perfect Price Discrimination
PPD = each customer is charged his or her maximum willingness to pay.
Since each consumer pays his or her maximum willingness to pay under PPD, consumers end up with no consumer surplus.
All of the gains from trade flow to the monopolist.
With this pricing strategy, the monopolist produces until P = MC.
This level of output equals that of competition.

23. PPD and Consumer Surplus
A Perfect Price Discriminator Marches Down the Demand Curve Charging Each Customer Their Maximum Willingness to Pay
Price
Quantity
Alex’s willingness to pay Qx
Tyler’s willingness to pay
Robin’s willingness to pay
Bryan’s willingness to pay MC D
Marginal Revenue with PPD

24. Perfect price discrimination causes the marginal revenue curve to equal the demand curve.
True
False
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25. PPD in Practice
In practice PPD is difficult to implement: it requires very detailed information on consumers’ maximum willingness to pay.
Still, producers go to great lengths to gather information on their consumers

26. Is Price Discrimination Bad?
If price discrimination increases output, then total surplus will increase. This greater output reduces the deadweight loss of monopoly. If the firm practices PPD, then the deadweight loss of monopoly is eliminated. Price discrimination makes it easier for firms to cover the fixed costs- increasing the incentives to innovate.

27. Tying and Bundling
Tying = a form of price discrimination in which one good, called the base good, is tied to a second good called the variable good.
Firms are not just selling individual goods but rather a package good.

28. Tying allows firms to price discriminate.
Firms price discriminate by pricing the base good below cost and the variable good above cost.
Consumers reveal their willingness to pay through the variable good.
Firms basically charge a different price to every consumer based on their usage of the variable good.
Printing a lot? You have a higher willingness to pay-- and will pay more in ink costs.

29. Bundling
Bundling = requiring products be purchased together in a bundle or package.
Firms use bundling when they have more information on the demand for the bundle than for the individual parts.
Bundling may help prevent arbitrage.
A Bundle of Chapters?

30. Maximum Willingness to Pay for Word and Excel
Bundling in Action
Maximum Willingness to Pay for Word and Excel
Amanda
Yvonne
Word
$100
$40
Excel
$20
$90
If Microsoft sets prices individually, it can earn greater profits by pricing Word at $100 and Excel at $90 (assuming marginal cost of zero).
At a price of $40, both Amanda and Yvonne will purchase Word and profits will be $80.
At a price of $100, only Amanda will purchase Word and profits will be $100.
At a price of $20, both Amanda and Yvonne will purchase Excel and profits will be $40.
At a price of $90, only Yvonne will purchase Excel and profits will be $90.

31. Maximum Willingness to Pay for Word and Excel
Bundling in Action
Maximum Willingness to Pay for Word and Excel
Amanda
Yvonne
Word
$100
$40
Excel
$20
$90
Office
$120
$130
If Microsoft bundles Word and Excel, the profit maximizing price is $120 (assuming marginal cost of zero). At a price of $130, only Amanda will purchase Office and profits will be $130. At a price of $120, both Amanda and Yvonne will purchase Office and profits will be $240. By bundling Word and Excel into Office, Microsoft increases profits.