Question

Title: Pricing Strategies Used by the Firms with Market Power Managerial Economics basically is an applied microeconomics. It equips the managers with knowledge that how they can make use of microeconomics theory in managerial decision making and make informed decisions. Suppose after completing your undergraduate program, you join a consultancy firm that provides consultancy to the firms that have market power. Your manager assigns you the duty to prepare a handbook about the strategies adopted by the firms with market power to maximize the profits. These strategies pertain to: - Exacting surplus from consumers Pricing strategies for special cost and demand structures Pricing strategies in markets with intense price competition - Many of these strategies permit firms to earn profits that are greater than those of a single- price monopolist by using: - Price discrimination - Two-part pricing Commodity bundling - Peak-load pricing What you will do? In this assignment you will explain all the above given four strategies using relevant examples (your own not from the book), graphs, formulas and tables. There is no limit on the length of the assignment. But you are expected to explain all the strategies precisely. The evaluation will be on the basis of the content. The weightage assigned to write up on each strategy is as under: Price discrimination (25%, means 5 marks) - Two-part pricing (25%, means 5 marks) Commodity bundling (25%, means 5 marks) Peak-load pricing (25%, means 5 marks) Use the terminology of economics in the explanation.

managerial economics, i would like 3-4 pages thank you.

Answer 1

ifferent prices for PRICE DISCRIMINATION ( MONOPOLY) kan at refer to the practic of selling identical producs at different bricus different quantities to different buyers. • Probi stigler defines price discelination as the sales of technically similar pood ucts at prices which are not proportional to marginal costs. • Types of PDO ti ) Personal - different prices from different persons sig weal - different puces from people of diff. plaus I markets. (ii.) According to use or trade - for domestic use lower prices au changed and for commercial use higher prices au charged. I like milk etc) o • Basis for P.D.lt charging diff. puces to diff. consumers by identifying cusunces paying capacity. • Conditions for P.O (I.) It is possible only if it is not posible to tausfer) any unit of the good from our market to another Wo resale) a) It should not be possible for the buyers in the deares mabet to taster (the uselves into the cheaper market to buy puu. good / slavice at the town (II.) The firm possesses market pown. .. Degrees of P.1) - distinguished by Prof. Ac Pigout (I.) 1st Degree Price Discrimination : ( take it or leave it P.D.) known as perfect briu disurmination as it involves mas possible exploitate of each buyer in the interest of selleis profit - it orcus when the monopoly is able to sell each separate unit of the - product at a different peice paying capacity. - consumer is changed his reservation pury] re the max puke that one can pay such that he is left with no consumen acuplus. nor MR! MR cuire = AR =AN as each additional u Sold colds to revenue an amant equal to pucy T for which it is sold. > Eq output is similar to p.e.m. output Economic in perfect puce monopoly > Econo O lif dizue - profits in pure monopoly el marcopoly ! FREMR: pofit es scanned with. CamScanner

0. A MC Simple monchole A evo cant prica disui minating monopoly is mou allocatively effrient monopoly due to the than pure production of greater output Reason A P.D. is rather difficult to implement in practice as one nust know the exact shape of consumeis demand curve in eclive in order to charge order to the reservation pace. & less common in practice) output produced under perfect bid, is Pauto optimal & pom output au P = MC (II) and degree P.D :( Non-linear P.D.) I BLOCK PRICING ) eg hospital bill as bu cliff uslo It occuus when monopolist is able to change several different prices for different nauges or groups of output which is the lowest demand bein of that group. Faceg bulk discount a quantity discounts block pricing , buy one get one free when firms charge diff. price to diff consumes for some good (identical ) baxd on the quantity purchased. (toiew a part of is l not entire cs) - Á es nomboly - In equilibrium , Priu o P e Quentity=0Qs es in simple in me When and degrul P.D is practiced, OQ, is available at op, put cu t oa, avallable at op pelce > units before less than OQ, would be available at op, price rather than comes pouding higher prices acc. to dinand ceuve \ AR DD consumee will enjoy suples. But at the cuit, no suples is there on Qi Qc Q2 → X . Tupact on evrionic profits simple nouopoly profits = an At Ps BD but if does Ind degree bed, he gets additional profit of an a to the shaded A. - Impact on consumer suples a total consumer suplus - Results: e same consumas will pay higher prius (buying lowce quantities) while other bay lower feices e buying in bulk). 2) An î in pos - (economic profits & rines for those who pay torrest pius et in cis. who pay high prices. 1. 3.). Allocative efficiency increases as output increases, compared to shugle price seller time benes (1) 3rd Degree P.D : ( Market segmentation Pricing) - metally a geography basis sepauated when a tum sells the same product to different consumers for diffeunt prices E kased on the elasticity of deurant among the consumer groups. s conditions : seqrlagation of market based on different consumers willingues e to pay and price elasticity of demand ( responsiveness to puce clayu) T e rregedoritdiscounts at movie tickets airline tickets ( time of puschase) etc, amScanner o mietk oli haris

Total output is divided blw say two groups such that Mr me ate of MR > MR₂ = boducer will sell mou in 1st market / group till kunde 1. MR. = MRI of two groups . - The monopolist will allocate his output in two markets so that rer [MR, = MR₂ = MC-01 porut where the output-puu is allocated) conditions & slope of Mc> slope of MR, I slope of MR2 MR, - P, 11-) MR, = P₂ ( 1 ) using o we have P,11-,) = P('=) of P,>P2 , then e, xe, which implies a discriminating monopolist will charge - a higher peru to the group with the less elastic demand and vice versa. * of P, = B2, the profit maximising bele be same for the wo groups, there would be no price discrimination (rather the monopoly would loose) * RI The group 2 or mkt 2 which was more beice sensitive or with more elastic demad pays lesse feice as compared to other group -ARCeleste) = McCfor (do pice elastuty of demand determines milless clestie convinima) the mout a bull discimination Scinned with "MR2 for the monopolist). CamScagnez мм

TWO PART TARiff : - Letting MRaMC) L It is related to pice discrimination and provides auther mears of extracting consumer suples. It is a form of pricing in which consumes ene charged betti on entry and a usage fee. It requires consumed to pay a fee up tout for the right to buy a product and there pay an additional fee for each unit of the product they consume eig. amusement park . PurpoH i to taus für man best! 6.5 horobous! I single consumer case . firm knows the usueis demand care lassemption The firm will set the usage fee P equal to the so as to extract all the consumer suples fine entry fee equals to Tramont, per mit Price = p*= MC NEU SA 24 mener puce) CSI Scanned with CamScanner

culd Tuю Сошимц Case } Price over exploit 1. The firm can't set usage fee equal to me! as it would mean it would overe the consumed with lown demand and on that customer ie will lead to profit maximisation - Instead, firm should set the usage fee abou MC and then set the entry fea equals to the remaring consumer suples of consumed with omaller demaid Output an As a result, resulting profit us 2 7 *+ (P²Mc) (Q,+Q) which is lagu than twice the area A ABC A Den P2 you Qz Consunce can : Mary propt no srupte formula to calculate optied tur paut tauff in this case il Awal & eua experiments might? be required Call/ - → Starting with a number of prices, optimal tis delamined by repeating the trials. Titotul) -> T = That the en(t) T + (P-MC) Qim) rsales) a fee] where no no of entrants which defends out & Q is the rate of sales 1 - This equation is been maximised. Moundada wait needed to design an optional two- part tariff than to choose a ahuga pucher le knowing Med demand cure is not enough. e

consumers I other goods (money) Club visiting club Q : No. of club visits mi amount of money spent on other goods I: Income Q: Membership fees Pi Price / visit Total expenditure Total Cousumex's Budget constraint? m+P+P.Q SI titility function of consumer (Quasi-linear) U = mitava Masanize Ua m+25Q subject to m+Q+ P.Q=I ma I-&-P.Q U=I-8-PQ +2Ja de 04 - P+22 =0 eta a IMP. NOTES Scanned with CamScanner

DAY 10:203. WEEK IS 16 17 " 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 10 Ini, No Membership fees. 0-0 Suppose club has a limited capacity K o Pruce per visit P r o What is that level of q, which will mascimized monopoly's Profit & 12 Soft To P. Q = Q = JQ . A = a) Maximum Profit which you get 2 Proposition: under the preference structure given as above, Monopoly club sets the peuce at which demand for club visits equals its capacity. TP = A/VR Q = k , T = JKT : → I is associated with that initial utility where consunder spends all income a on other goods , Slope ge = P, IMP. NOTES cs Scanned with CamScanner

JJU I who WITX 15 - DAY 103-262 Lase Membership fees o70 To suppose club offers the consumer an opportunity to o pay a fired amount o>0 and receive a package 1 containing fired no. of free visits a Anoint spending on . consumer .. No wors off than he would - be with no Maximise lub visits caje, fm -4,0 no (0)= 0 Subou, z eta 1. M+2TQ . I-0+25K? I I-0 +2JK= I Q (0 = 2.5) (Tg = 25K - Q Espending Ath asa Proposition 2 Under a fired fee for a bundle of visits yield the higher profit to the club than any profit generated with a per unit price with no annual fee. Mo = (©202 ; $20) - LJK 7 Ike (<9kte ATTI Profits under and Care > Profit under 1 st case, IMP. NOTES Scanned with TEST CamScanner

u ologi elechicity consu PEAK LOAD PRICING :: (103 UTJU It involves charging higher peces during peak periods when capacity constants cause Me to be high ♥ Objective: To increase fonomic efficiency by changing consumer peces that are close - to marginal cost basis we winter at is a type of intele taupad pd in summer 1 wi based ou efficiency - a wtel bookings D, = peak perlod demand D₂ = non- peak period demand. . The firm sets MR = MC for he each perlod obtaining the because of differ OP, bice (high) for peak period and lowa perce D (peak period op, for non-peak perlod fiquen ) beak (Prices are different in MC'}" I demand) selling quantities Q, l Q2 respectively. This naise the firm's profit what it would be charging one price for all berods. The sum of produce e consumer suuples is greater because prices are close to Mc le more efficient i NOTE : It is different from S TATTEO WAT in Peak lood puring, beices au 3nd deque PD as in the latte, wo progam Sopomel determined independently by MR has to be equal for each gap un PART TARIFF : Letting MRMC) a of consumes & equal to MC BUT

DAY 109-256 - WEEK 16 1. 13 14 15 16 16 17 18 19 20 21 22 17 23 24 25 26 27 28 29 PEAK LOAD 12 10 Consider a Monopoly airline company flying on a single route during H&L season. I go и , {P*, «Н {P., Qu] 5 High Season - how season PHR AN MH . PC - AL - @ C A ZA" > О cast Capacity Costa No. of airline seats e variable Cost - Cost associated with Handling e of each passanget. Unit Capacity cost s r o Unit variable cost :c7o Total Capacity = k to Ques. I write the expression for Total Cost - function TC (QH, Q , k). How is this expression different from discriminating monopoly Quy. 2 . Derive. Monopoly's T-max seasonal pricing & output structures IN IMP. NOTES Scanned with.. A CamScanner

21 22 23 24 25 26 27 1 28 29 30 31 10 - TC COM Q', *)2 r.K+ ÇQut cop Mix 16 - DAY 10 255 - Tack + C CQHT Q V Investment in capacity in H season requires No I investment in capacity in a season. 12 Above equation implies that this cost structure is showing the case of sout production where production cost in one market also - partially covers the cost of producing in the 2 other market, o 3 MRH (QH) = MC 2 ctr (High season) MRL (Qu) = Me = c Chow season phant ctr > pe a AAC 2 z Au IMP. NOTES canned with amScanner