Scribd
Upload
40 views

Pricing With Market Power - 2024

Uploaded by

Shruti bajaj
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
40 views

Pricing With Market Power - 2024

Uploaded by

Shruti bajaj
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 16

Pricing with Market Power

PROF. VANITA SINGH


MDI, GURGAON
RECAP -MONOPOLY

 The cost of production for a monopoly


firm is given.
 Find Profit maximizing output, total
profit
Rule of Thumb for Pricing

 Price and output should be chosen so that Marginal Revenue (MR) equals Marginal
Cost (MC)

 Firm has less


power to mark up its price above marginal cost when it
faces a more elastic demand.
 the markup percentage is equal to the negative inverse of the price elasticity of
demand.
 P-MC/P =-1/Ed
The Lerner Index

 L.I. = P-MC/P = -1/e


 Price equals MC when firms are price takers so L.I. is zero under
competition
 Market power is inversely related to elasticity
Measures of Market Power

 Cross-price elasticity
 A large positive cross price elasticity is an indicator of close substitute
 Economies of scale : when Long run average cost curve declines with
increasing Q, thus, a new entrant must enter on a large scale
 Essential input barrier: access to mines
 Brand Loyalities
 Consumer Lock-in: very high switching cost
 Network Externalities: when your utility varies with the total number of
consumers of that good. For example: cell-phones, internet, free call
services
Effect of tax on PRICE

 If a tax amounting t is levied ,


 Then MR = MC +t
 If elasticity is -2 and a constant marginal cost, then what will be the
increase in price
Price Discrimination – First Degree

 Practice of charging different prices to


different consumers for similar goods
 Reservation price Maximum price that a
customer is willing to pay for a good.
 First degree price discrimination
Practice of charging each customer her
reservation price.
Second Degree Price Discrimination

 Practice of charging different prices per unit for different quantities of the
same good or service
 Water, electricity
 Quantity discount is an example od second-degree
 Block pricing: different prices for different quantities or “blocks” of a good
Third-degree Price Discrimination

 Dividing consumers into two or more categories with separate demand


curves
 Premium vs non-premium
 Special discounts for College students
Intertemporal and Peak-Load Price
Discrimination

 Intertemporal
 High demand and low demand groups, charging different prices at different
points in time
 First run movie
 First edition of a book – hardcover and then launching at a lower price
 Peak-Load Pricing
 Charging consumers close to marginal cost
Two-part tariff

 Consumers are charged both an entry and a usage fee


 Amusement parks, Clubs
 Firm charges a fixed price for the right to purchase its goods , plus a per-
unit charge
 Firm can increase profits by engaging in two-part pricing: a per-unit price
that equals marginal cost, plus a fixed fee equal to the consumer surplus
each consumer receives at this per-unit price
Bundling

 Practice of selling two or more products as a


package.
 When customers have heterogenous demands
but firms cannot price discriminate
When Bundling is an Ideal Strategy

 In (a), because demands are perfectly


positively correlated, the firm does not
gain by bundling: It would earn the
same profit by selling the goods
separately.
 In (b), demands are perfectly negatively
correlated. Bundling is the ideal
strategy—all the consumer surplus can
be extracted.
How Bundling Strategy Increases
Profits

 If the films are rented separately, the maximum price that could be charged for Wind is $10,000 because
charging more would exclude Theater B. Similarly, the maximum price that could be charged for Gertie is
$3000.
 But suppose the films are bundled. Theater A values the pair of films at $15,000 ( $12,000 + $3000 ) ,

Theater B values the pair at $14,000 ($10,000 + $4000).

Therefore, we can charge each theater $14,000 for the pair of films and earn a total revenue of
$28,000
Requirements for Price Discrimination

 Profitable price discrimination:


 supply-side market power,
 the ability to separate customers, and
 differingdemand elasticities for different classes of
customers.
Thank you

You might also like