Industrial Economics - Appunti

Price Discrimination, Linear Pricing and Revenue Management

Selling strategy that charges customers different prices for the same product or service based on what the seller thinks they can get.

- Can be fair or not

• To increase profit
• Affect market efficiency

Focusing on Consumer Surplus

Uniform price - reducing the price - selling more units and gain in terms of additional revenue from the additional units.

Feasibility of Price Discrimination

• Identification - the firm is able to identify demands of different types of customers or in separate markets.
• Easier in some markets than others:
• Tax consultants
• Doctors
• Social networks

• Arbitrage - Prevent customers who are charged a low price from reselling to customers who are charged a high price.

Prevent re-importation (e.g. prescription drugs prescribed in US).

e.g. Gasoline in Slovenia costs less than here - you hire a truck and go there - you cannot sell it here.

In order to use price discrimination the firm needs to confront arbitrage and identification.

Type of discriminations:

• First-degree / Personalized Pricing
• Second-degree / Menu Pricing
• Third-degree / Group Pricing (Multimarket Discrimination)

Third-degree

• The firms identify groups of customers with willingness to pay.
• Price is fixed but there are prices for a specific customer group.
• A uniform price is charged to all customers in a particular group.
• Uniform prices are charged to groups:
• Kids tickets
• Airlines etc.

Pricing rule: Consumers with low elasticity of demand should be charged a high price.

Customers with high elasticity of demand should be charged a low price because consumers are more sensitive to price changes.

Ex. Harry Potter volume sold in UK and US if no price discrimination.

US: Pe = 36 - 40u

UK: Pe = 24 - 40c

C: 43 for both

Price Discrimination, Linear Pricing and Revenue Management

Selling strategy that charges customers different prices for the same product or service based on what the seller thinks they could get. It could be fair or not.

• Profit
• Affect market efficiency

Focusing on Consumer Surplus

Uniform price - reducing the price - selling more units could bring additional revenues from the additional units.

Feasibility of Price Discrimination

• Identification - The firm is able to identify demands of different types of customers or in separate markets.
• Easier in some markets than in others
• Tax consultants
• Doctors
• Social networks

In order to use price discrimination, the firm needs to confront arbitrage and identification.

• First-Degree / Personalized Pricing
• Second-Degree / Menu Pricing
• Third-Degree / Group Pricing / Multimarket Discrimination

Third-Degree

The firm identifies customers' willingness to pay. Price is fixed but there are prices for a specific market group. A uniform price is charged to all customers in a particular group.

• Kids fare
• Airlines etc.

Pricing Rule:

• Consumers with low elasticity of demand should be charged a high price.
• Customers with high elasticity of demand should be charged a low price.

Ex Harry Potter volume sold in UK and US - No price discrimination

US P_u = 36-40$

UK P_e = 24-40£

C_i = 4$ for both

Solution may be

ex of revenue management - frequent fare changes of the seat on sale, international sale

contrary to common belief, at each point in time carriers do not post only one fare in their reservation system but instead, a fare for each seat that is still available on the flight

a fundamental aspect of RM consists in the definition of an increasing sequence that assigns a fare, starting from the cheapest and ending with the dearest, to each seat

discrimination among x time of booking, not among people

Price Discrimination and Monopoly - Non-linear Pricing

prices are not linear - non-fixed price per unity (quantity discount) - allow pricing nearer to willingness to pay - more profitable than 3rd degree price discrimination

First Degree Price Discrimination or Personalized Pricing

• long ago pay charge the maximum price that each consumer is willing to pay
• extracts all consumer surplus
• since profit is not total surplus, find that first-degree price discrimination is efficient
• but it's highly profitable but requires detailed information/machinery - ability to identify each type
• leads to the efficient choice of output: since equals marginal revenue and marginal
• no value - creating exchanges are missed
• two pricing is less restrictive but potentially a problem

PD. Personalized Pricing

• involves dynamically setting prices
• pricing according to consumer identifying information
• individual conduct or characteristics can be observed
• inferred or collected to determine pricing on what customer perceives their value to be

Algorithmic consumer price discrimination Ex Account Profiling and you give: email, address, and phone number

• buy into where you go
• based also on your links in social media
• can inferred your health, income, etc
• maybe the price is not the maximum the willingness to pay but still we have across consumers

So, arbitrage is less likely because they doesn't know they're paying a different price

Two Parts Pricing

• non-linear pricing
• ex: in charge of a quantity independent fee (membership) plus a percent usage
• credit cards that charge annual fees and per transaction fees
• cover charges at restaurants
• Block Pricing

26/03/2021

Es. 2

1. Which of the following are examples of (first-degree, second-degree, third-degree) price discrimination? Briefly explain your answers.

- The Italian gov auctions off leases on tracts of land in the Basilicata region, oil companies bid for the right to explore each tract of land and to extract oil.

- Lay down by the state

Why is it a problem of price discrimination? You're selling the right of extraction, i.e. companies are quoting higher prices for the service, which the same.

First-degree price discrimination: FIRST-DEGREE

Price quoted is closer to the willingness to pay (maximum I can pay)

* I don't know what the others quote

First, because all prices quoted form + companies are very close to the willingness to pay

The gov is the monopolist selling rights to the firm with the highest willingness to pay

- PAPA country club charges golfers $12 to play the first 9 holes of golf on a given day, $9 to play an additional 9 holes and $6 to play 9-holes more.

SECOND-DEGREE -> charging different prices based on quantity quantity discount

On average you play more holes you pay less

- You can buy one computer disk for 10$, a pack of 3 for $27, or a pack of 10 for $75

SECOND-DEGREE -> quantity discount

- When you fly from NM to Chicago, the airline charges you $250 if you buy a ticket 14 days in advance, but $350 if you buy the ticket on the day of travel

THIRD-DEGREE -> different willingness to pay + groups of consumers

- The publishers of the Journal of Price Discrimination charge a subscription price of $75 per year to individuals and $30 per year to libraries

THIRD-DEGREE -> + groups of consumers Demand curve for libraries + than for individuals willingness to pay more

TIH telephone company charges you $0.10 per minute to make a long-distance call from Monday to Saturday and $0.05 per minute on Sunday

THIRD-DEGREE -> line ticket flights

You know that if you call during the week has a + demand curve Sunday more sensible to price

+ demand curve + during the week day probably for work reason behaved more rigid