Question: perfect price discrimination (1st degree)
Answer: -charging each consumer their reservation price
-consumers pay different prices for the same product
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Question: is perfect price discrimination possible?
Answer: No:
1. impractical to charge each and every customer a different price (unless there are only a few customers)

2. a firm usually does not know the reservation price of each customer
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Question: Imperfect Price Discrimination
Answer: Groups of consumers are charged different prices
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Question: is Imperfect Price Discrimination possible?
Answer: Yes: different prices based on estimates of customers' reservation prices

-is possible with doctors, lawyers, accountants, or architects, who know their clients reasonably well
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Question: second degree price discrimination
Answer: charging different prices per unit for different quantities of the same good or service
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Question: block pricing
Answer: Practice of charging different prices for different quantities or "blocks" of a good.
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Question: reservation price
Answer: maximum price that a consumer is willing to pay for a good
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Question: perfect price discrimination ex:
Answer: -need based scholarships
-used car salesperson
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Question: price discrimination includes what:
Answer: reservation price- there's a base price that consumers pay
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Question: price discrimination conditions:
Answer: 1. a firm must have market power

2. consumers must have demand curves that differ & firms must be able to identify how they differ

3. a firm must be able to prevent/limit resale
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Question: MRd =
Answer: P
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Question: Why do firms price discriminate?
Answer: -attract new customers
-increase profits
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Answer: charges each consumer their reservation price
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Answer: charges each consumer the same price
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Question: In which of the following market structures do firms produce the efficient level of output?

a) Perfect competition

b) Single-price monopoly

c) Perfect competition and perfect price discrimination

d) Perfect competition and single price monopoly
Answer: c) Perfect competition and perfect price discrimination
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Question: What is CS under perfect competition?
Answer: A + B + C
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Question: What is CS under single-price monopoly?
Answer: A
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Question: What is CS under perfect price discrimination?
Answer: $0
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Question: group price discrimination (3rd degree)
Answer: a firm divides customers into two or more groups & sets a different price for each group
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Question: group price discrimination ex:
Answer: -student discounts
-coupons
-different countries
-airlines charge more for business travelers than vacationers
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Question: the more elastic group receives:
Answer: the lower price (group price discrimination)
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Question: Lerner Index=
Answer: (P - MC)/P = (1/-Ed)
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Question: profit maximizing output
Answer: when MR = MC
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Question: two-part pricing
Answer: the firm charges a customer a lump-sum access fee for the right to buy as many units of the good as the consumer wants at a per price unit
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Question: lump-sum
Answer: membership fee
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Question: lump-sum access fee ex:
Answer: country club- membership + additional costs of food, equipment, etc.
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Question: Suppose there are two consumers for a monopolist's product. At the current price, both consumers have a consumer surplus of $100. By how much could a firm increase profits by using two-part tariff pricing?
Answer: $200- since both consumers' consumer surplus is $100, the most they could charge for each is $100, making their increase in profits = $200
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Question: Suppose there are two consumers, Jack and Diane. At the current price, Jack's consumer surplus is $100 and Diane's is $150. What is the most the firm could increase its profits by using two-part tariff pricing?
Answer: $200- the firm will charge an access fee of $100 (so both jack & diane will purchase a membership) otherwise, if they charge $150, then only diane will buy it
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Question: tie-in-sales
Answer: nonlinear pricing where customers can buy one product only if they agree to buy another product too
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Question: tie-in-sales ex:
Answer: Ford service center will only install Ford parts
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Question: requirement tie-in-sales
Answer: customers who buy one product from a firm are required to make all their purchases of another product of that firm
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Question: requirement tie-in-sales ex:
Answer: purchasing a printer & ink cartridges
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Question: bundling
Answer: two or more goods are sold together for a single price
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Question: bundling ex:
Answer: computer retailer sells the compute, software & printer together
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Question: types of tie-in sales
Answer: 1. tie-in-sales
2. requirement tie-in-sales
3. bundling
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Question: Firms with market power employ various pricing strategies designed to immediately capture consumer surplus and convert it into additional profits. Which of the following is not one of those pricing strategies?

A. Predatory pricing.
B. Two-part tariffs.
C. Price discrimination.
D. Bundling.
Answer: A. Predatory pricing.
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Question: How does a car salesperson practice price discrimination? The salesperson practices:

A. first-degree price discrimination by trying to charge an entry fee and a per unit price.

B. predatory price discrimination by trying to charge different prices to different groups of consumers.

C. third-degree price discrimination by trying to determine each customer's demand.

D. second-degree price discrimination by trying to determine each customer's marginal value.

E. imperfect price discrimination by trying to determine each customer's reservation price.
Answer: E. imperfect price discrimination by trying to determine each customer's reservation price.
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Question: How does the ability to discriminate correctly affect earnings?

A. If the negotiated price is higher than the reservation price, a sale is lost, and if the negotiated price is lower than the reservation price, some profit is lost.

B. If the reservation price is higher or lower than the reservation price, revenue is gained.

C. If the negotiated price equals the reservation price, profit equals zero.

D. If the negotiated price is higher than the reservation price, some profit is lost, and if the negotiated price is lower than the reservation price, a sale is lost.

E. If the reservation price is higher or lower than the reservation price, a sale is lost.
Answer: A. If the negotiated price is higher than the reservation price, a sale is lost, and if the negotiated price is lower than the reservation price, some profit is lost.
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Question: A monopolist that practices perfect price discrimination:

A. charges each consumer the maximum price the consumer is willing to pay.

B. drives consumer surplus to zero.

C. produces the perfectly competitive level of output.

D. All of the above are correct.

E. Only A and B are correct.
Answer: D. All of the above are correct.
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Question: A price-discriminating monopolist will charge a higher price to consumers whose demand is:

A. horizontal.
B. less elastic.
C. more elastic.
D. linear.
Answer: B. less elastic.
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Question: How is peak-load pricing a form of price discrimination? It is a form of price discrimination because:

A. demand can vary with customer age; thus, the firm can charge a lower price to customers whose demand is more elastic.

B. demand can vary with the time of day; thus, the firm can charge a lower price when demand is more elastic and marginal cost is lower.

C. demand can vary with the time of day; thus, the firm can charge a lower price when demand is higher and marginal cost is lower.

D. demand can vary with the time of day; thus, the firm can charge a higher price when demand is more elastic and marginal cost is higher.

E. demand can vary with customer age; thus, the firm can charge a lower price to customers whose demand is higher.
Answer: B. demand can vary with the time of day; thus, the firm can charge a lower price when demand is more elastic and marginal cost is lower.
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Question: Can it make consumers better off? With peak-load pricing, consumers are:

A. worse off because firms charge higher prices.

B. better off because prices are further from marginal cost.

C. better off because of increased efficiency.

D. better off because marginal costs are minimized.

E. worse off because firms capture consumer surplus.
Answer: C. better off because of increased efficiency.
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Question: Suppose a long bridge into a major U.S. city charges a higher toll (price) during rush hours on weekdays than at other times of the day. This is an example of:

A. second-degree price discrimination.
B. third-degree price discrimination.
C. intertemporal price discrimination.
D. peak-load pricing.
Answer: D. peak-load pricing.
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Question: A firm sells a product and the refills that must be used to operate the product (like printers and ink cartridges). The firm wants to design a two-part tariff for pricing the product (the entry fee) and its refills (the usage fee). If all its customers have the same demand curve, the firm should set:

A. the price of the product equal to marginal cost and the price of the refills equal to each customer's consumer surplus.

B. the price of the refills at the monopoly level and give away the product.

C. the price of the product at the monopoly level and give away the refills.

D. the price of the refills equal to marginal cost and the price of the product equal to each customer's consumer surplus.
Answer: D. the price of the refills equal to marginal cost and the price of the product equal to each customer's consumer surplus.
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Question: Bundling is the practice of selling two or more products packaged together for a single package price. In the case of two goods, bundling works best (i.e., is most profitable) when:

A. consumers who have a high reservation price for good 1 also have a high reservation price for good 2, while consumers who have a low reservation price for good 1 also have a low reservation price for good 2.

B. all consumers have highly elastic demands for both goods.

C. consumers who have a high reservation price for good 1 have a low reservation price for good 2, and vice versa.

D. all consumers have very inelastic demands for both goods.
Answer: C. consumers who have a high reservation price for good 1 have a low reservation price for good 2, and vice versa.
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Question: Most retail stores that sell digital cameras also sell camera bags and lens cleaning kits. They also frequently sell cameras with a bag and cleaning kit as a package at a price that is less than the sum of the prices of the individual items. This is an example of:

A. pure bundling.

B. a two-part tariff.

C. tying.

D. mixed bundling.
Answer: D. mixed bundling.
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Question: All the pricing strategies that we will examine have one thing in common:
Answer: They are means of capturing consumer surplus and transferring it to the producer
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Question: price discrimination
Answer: Practice of charging different prices to different consumers for similar goods.
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Question: mixed bundling
Answer: Selling two or more goods both as a package and individually.
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Question: pure bundling
Answer: Selling products only as a package.
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Question: tying
Answer: Practice of requiring a customer to purchase one good in order to purchase another.
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Question: tie-in sales rule:
Answer: always sell for the lower price so the most amount of people buy it
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Question: how does elasticity affect the size of the price markup above MC?
Answer: consumers with lower demand elasticity are charged with a higher price
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Question: how do access/entry fees impact the amount of units the consumer will consume?
Answer: if the entry fee is more than CS, then consumer demand will decrease
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Question: When does bundling work well?
Answer: bundling makes sense when consumers have heterogeneous demands & when a firm cant price discriminate
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Question: why do firms bundle rather than sell products separately?
Answer: enables producers to offer the bundle more cheaply & provide more value to consumers who want both products
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Question: pros of bundling
Answer: provides efficiencies:
-MC savings
-quality improvements
-customer convenience
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