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Lecture 2

ECON 100B Lecture Notes - Lecture 2: Price Discrimination, Market Power, Economic Surplus


Department
Economics
Course Code
ECON 100B
Professor
CHAKRABORTY, D
Lecture
2

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Econ 100B Lecture 2 - April 12, 2018
Firms with market power pricing and other strategies (Chapter 11) Continue
Review
Why come up with pricing strategies?
Capture consumer surplus
What is pricing strategy
It’s a firm's’ method of pricing its product based on market characteristics such
that is can maximize its profit
The characteristic firms mainly consider is elasticity of demand for their product
Firms can successfully price discriminate when they have market power and can
prevent resale
Price discrimination - charge a different price to each consumer or segments of
consumers
First degree price discrimination - charge each cosuner their reservation (very hard to
practice in reality)
Second degree price discrimination
What is third degree price discrimination?
In some scenarios, firms may be able to segment their consumers based on some
common characteristics
A firm charges different price to different groups or segment of consumer
The market characteristic on which the pricing strategy is based on elasticity of
demand
Group with more elastic demand gets lower prices
When to practice this?
The firm has market power and can prevent resale
The firm’s customers have different demand curves
The firm can directly identify specific groups of customers with different price
sensitivities before purchase
Identify the segments of consumers by identify the more price sensitive segment and
charge them less
Customer characteristics: age and gender
Repeat customers may be more price sensitive such as software updates are less
expensive than the initial purchase
Based on local demand characteristics
Early adopters of a technology me be less price sensitive than late adopters. The latter is
ready to wait till price of a product drops
Consider the California Neighbor Pass for Universal Studios. Two types of consumers
usually go to Universal Studios in Los Angeles
Local
People flying from somewhere else (Usually from other states in the US)
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