class 9. pricing models cost plus pricing price discrimination peak load pricing transfer pricing
Post on 01-Jan-2016
221 Views
Preview:
TRANSCRIPT
Class 9Class 9
Pricing ModelsPricing Models
Cost Plus PricingCost Plus Pricing
Price DiscriminationPrice Discrimination
Peak Load PricingPeak Load Pricing
Transfer PricingTransfer Pricing
Cost Plus PricingCost Plus Pricing
Price = AVC + % Mark upPrice = AVC + % Mark up
Price = (1+m)*AVCPrice = (1+m)*AVC
However:However:– If AVC varies with output, the firm needs to If AVC varies with output, the firm needs to
know its output level before it can determine know its output level before it can determine its priceits price
– Also, it does not imply price stability if costs Also, it does not imply price stability if costs are themselves changing, or if there are are themselves changing, or if there are demand fluctuationsdemand fluctuations
Cost plus pricing is equal to profit Cost plus pricing is equal to profit maximizing pricing if AVC is approximately maximizing pricing if AVC is approximately constant and mark up is set to a valueconstant and mark up is set to a value
The more price inelastic the demand, the The more price inelastic the demand, the larger mark up is required for profit max.larger mark up is required for profit max.
When competition is high, PED is likely to When competition is high, PED is likely to be hgh in which mark up is smallbe hgh in which mark up is small
Mathematical derivation in the text.Mathematical derivation in the text.
Price DiscriminationPrice Discrimination
Discounts for student or senior citizensBuy two, get one freePhone companies charge different rates to businesses
vs. households.Journals charge different rates to individual subscribers
vs. libraries.Cellular phone companies charge differently depending
on the # of minutes you plan to talk.Reward-the-planned discrimination
Usually tickets that are purchased in advance have lower price
Make-them-pay-for-the-label discriminationToyota Corolla and GEO Prizm come off the same production line, but have
different prices. Is this really pricE discrimination - charging differentprices for the same product? Consumers receiving the label gain status and prestige. Is it the physical
characteristics of a good or its label that determines whether it is the same product?
Keep-them-in-their-zones discriminationPrices change between different neighborhoods within the same city.
Sort-by-value-of-time discriminationProducers supply coupons or rebates to consumers willing to spend the extra
time needed to find and clip them.• Sort-by-eagerness discrimination
Hardcover books vs. paperbacks.End-of-season sales.
Types of Price DiscriminationTypes of Price Discrimination
First degree price discrimination: Price per First degree price discrimination: Price per unit of output depends o the identity of the unit of output depends o the identity of the purchaser and the number of units purchaser and the number of units purchasedpurchasedSecond degree price discrimination: Price Second degree price discrimination: Price depends on the number of units depends on the number of units purchasedpurchasedThird degree price discrimination: Price Third degree price discrimination: Price depends on the identity of the purchaser depends on the identity of the purchaser
First Degree Price DiscriminationFirst Degree Price Discrimination
The condition where market demand The condition where market demand function represents a large number of function represents a large number of consumersconsumers
Eachone either buys one unit of good or Eachone either buys one unit of good or abstains from buying alltogetherabstains from buying alltogether
Reservation price: Maximum price the Reservation price: Maximum price the consumer is willing to payconsumer is willing to pay
Figure 10.1 First-degree price discrimination
The outcome is superior on allocative efficiency The outcome is superior on allocative efficiency criteria for the following reasons:criteria for the following reasons:– in the non discriminating case, it is possible to make in the non discriminating case, it is possible to make
someone better off without making anyone worse off someone better off without making anyone worse off because there is a consumer who is willing to pay a because there is a consumer who is willing to pay a price for extra unit that would exceed the cost of price for extra unit that would exceed the cost of producing this extra unitproducing this extra unit
– With first degree price disc. İt is not possible to make With first degree price disc. İt is not possible to make someone better off withput making anyone worse offsomeone better off withput making anyone worse off
Second Degree Price Disc.Second Degree Price Disc.
It may not be practical to distinguish It may not be practical to distinguish between individuals.between individuals.
Therefore distinguish by groups and Therefore distinguish by groups and charge depending on the units sold.charge depending on the units sold.
Figure 10.2 Second-degree price discrimination (two-part tariff)
Third Degree Price DiscriminationThird Degree Price Discrimination
The monopolist charges different groups The monopolist charges different groups of customers different prices. Price does of customers different prices. Price does not depend on units sold.not depend on units sold.
Figure 10.3 Third-degree price discrimination
Peak Load PricingPeak Load Pricing
Demand variesDemand varies
Peak times and off peak periodsPeak times and off peak periods
Figure 10.5 Peak-load pricing: full capacity production in both periods
top related