1. The Economics of Organisations and Strategy

2. Chapter 11 Price Discrimination and Bundling

3. The Economics of Organisations and Strategy The purpose of this tool is to allow you to test your understanding of basic microeconomic concepts and also to help you build confidence. These notes are by no means exhaustive, and it is recommended that you refer to the chapter for a fuller understanding of the issues. To use the tutorial, read the question(s), and decide upon the most appropriate answer, by clicking on the A, B, C or D button. Questions can be skipped by clicking on the appropriate button at the bottom or tabs at the top of the screen. You can always end the session by clicking on the ‘End’ button. End Welcome to the Economics of Organisations & Strategy Tutorial

4. The Economics of Organisations and Strategy Chapter 11 - Question 1 Price discrimination is correctly defined as charging customers for the same product: End B C A D Different point of sale prices; Prices that are in different ratios to a common marginal cost; A different price if they buy in bulk; Higher prices the more they buy. B

5. The Economics of Organisations and Strategy Chapter 11 - Question 2 Which of the following is not a recognised form of price discrimination: End B C A D Customers are separated into distinct groups and each group is charged a different price; Output is sold in tranches at successively lower prices; Customers are charged a flat entrance fee and a fixed price per unit consumed; Each unit of output is sold at a different price. C

6. The Economics of Organisations and Strategy Chapter 11 - Question 3 Which of the following statements are true for first degree price discrimination? End B C A D The demand curve becomes the firm’s marginal revenue curve; Economic rent is maximised; Consumers’ surplus is reduced to zero; All of the above. D

7. The Economics of Organisations and Strategy Chapter 11 - Question 4 Second degree price discrimination is also known as: End B C A D Curvi-linear pricing; Non-linear pricing; Parallel pricing; Consumer pricing. B

8. The Economics of Organisations and Strategy Chapter 11 - Question 5 Which of the following is not a necessary condition for third degree price discrimination to be effective in increasing a firm’s revenue: End B C A D The firm must benefit from economies of scale; Different groups of consumers value the product differently; The firm must be able to prevent arbitrage; Different groups of consumers have different search costs. A

9. The Economics of Organisations and Strategy Chapter 11 - Question 6 Another form of price discrimination is basing point pricing. This pricing system is based on an industry wide agreement that prices will be based on: End B C A D A published list price for the industry, plus delivery transport costs; Firm determined prices, plus delivery transport costs; A basic price that includes all transport costs from factory to delivery; Published list prices at specific locations, plus delivery transport costs. D

10. The Economics of Organisations and Strategy Chapter 11 - Question 7 A widely used form of price discrimination is bundling. This system is based on two or more products: End B C A D Being viewed by consumers as complementary; Being packaged in identical containers; Being sold together; Being offered at slightly different prices. C

11. The Economics of Organisations and Strategy Chapter 11 - Question 8 Which of the following is not a possible consequence of price discrimination, and therefore unlikely to be investigated by competition authorities: End B C A D Charging excessively high prices to some consumers; Increasing the overall supply and reducing unit costs; Charging predatory prices in one market segment; An intermediate supplier favouring some customers. B

12. The Economics of Organisations and Strategy Chapter 11 – Answer 1 Correct answer: there is more than one reason why customers might be charged different prices and not be subject to price discrimination. For example, customers buying in bulk will reduce the supplying firm’s marginal cost and hence justify a lower price. It follows that a more robust definition refers to charging customers different prices when the marginal costs of supply are identical. EndReturn

13. The Economics of Organisations and Strategy Chapter 11 - Answer 2 EndReturn Correct answer: Charging a flat entrance fee and then a uniform price to customers is not discrimination – all customers are treated the same. Buttons A, B and D represented third, second and first degree price discrimination respectively.

14. The Economics of Organisations and Strategy Chapter 11 - Answer 3 Correct answer: By charging each customer their reservation price, points on the demand curve show the increase in revenue when a new customer purchases the product. The effect of this is to transfer the whole of the area under the demand curve above marginal costs to the firm in the form of rent, an outcome that involves reducing consumers’ surplus to zero. EndReturn

15. The Economics of Organisations and Strategy Chapter 11 - Answer 4 EndReturn Correct answer: Second degree price discrimination results in the price paid varying inversely with the quantity purchased; hence, the more a customer purchases in a given period, the lower the average price paid.

16. The Economics of Organisations and Strategy Chapter 11 - Answer 5 Correct answer: Third degree price discrimination involves selling the same product to different groups of consumers at prices that are in different ratios to a common marginal cost. If those buying in the lower priced market can sell to those in the higher priced market (ie, arbitrage) discrimination will not work. In order to pay a higher price, members of a group must either attach more value to the product, or their costs of search are high. EndReturn

17. The Economics of Organisations and Strategy Chapter 11 - Answer 6 Correct answer: The basing point form of price discrimination is based on industry wide cooperation, whereby industry rivals agree that delivered prices will be based on published list prices at specific locations, plus the cost of transport from these locations to the point of delivery. EndReturn

18. The Economics of Organisations and Strategy Chapter 11 - Answer 7 Correct answer: Where consumers have heterogeneous demands for two (or more) products, their valuations for the two products will vary. If the two products are offered as a bundle, then providing the bundled price does not exceed the sum of individuals’ reservation prices, the firm will sell more of both products, greatly increasing revenue. EndReturn

19. The Economics of Organisations and Strategy Chapter 11 - Answer 8 Correct answer: Price discrimination can raise a number of issues for the competition authorities. These arise if it is used to exploit market power or to create a barrier to entry. Price discrimination rarely involves an overall increase in supply, but if the result was lower unit costs and lower average prices the competition authorities would be pleased. EndReturn

20. The Economics of Organisations and Strategy Here you have several choices, you can either return to the question that you were asked, or, you may move on to the next question. If you wish to return to the question you were working on, then simply click on the RETURN button on the bottom right of the screen. You can END the session too. INCORRECT ANSWER EndReturn