Protein Shakes: Graph 1 1 12 8 4 Protein Shakes: Graph 2 2 12 - PDF document

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Page 1 Session 10 • Explicit Price Discrimination Protein Shakes: Graph 1 1 12 8 4 Protein Shakes: Graph 2 2 12 8 4

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Page 2 Session 10 • Explicit Price Discrimination Protein Shakes: Graph 3 3 12 12 8 8 4 4 1 Protein Shakes: Graph 4 4 16 16 12 12 8 8 4 4

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Page 3 Session 10 • Explicit Price Discrimination Protein Shakes: Graph 5 5 16 16 12 12 8 8 4 4 Session 10: Explicit Price Discrimination 6 ➥ 1. How prices depend on the demand curve (wrap up of Topic 9). 2. Charging different prices to different market segments (Topic 10). 3. Roxy Theater

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Page 4 Session 10 • Explicit Price Discrimination What happens to price after a shift in demand? 7 (Price-sensitivity effect) If demand becomes less elastic, the firm will increase its markup over MC , ⇒ higher prices. (Volume effect) ( only if MC curve is increasing ) If the MC curve is increasing and the firm increases output, then the resulting higher marginal cost ⇒ higher prices. The price of a substitute good rises. What do you do? 8 P 5 4 3 2 1 d ( P ) 1 2 3 4 5 6 7 Q

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Page 5 Session 10 • Explicit Price Discrimination 9 What happened to airline prices just after September 11, 2001? Airlines Hold Back on Expected Fare Bonanza But Samuel Buttrick, an airline analyst at UBS Warburg By Laurence Zuckerman and Joe Sharkey in New York, said he thought the number would be closer New York Times Service to 25 percent. Despite a decline of as much as 50 percent in passenger “The industry has little insight into what revenues will be traffic, major airlines have been reluctant to lower fares in November and December, as do we,” he said. drastically after the terrorist attacks in the United States. The major airlines routinely decline to comment on future Some bargains are being offered online by travel whole- fares because of past allegations that they breached antitrust salers and by small carriers, but the large fare sales that laws by signaling their pricing plans to competitors. many analysts predicted have not materialized. But leisure fares “are totally unpredictable” said Alyse The reason, airline executives said, is that fares had been Ticker, the manager of Equinox Travel in Manhasset, New discounted heavily before the attacks to try to counter an York. “The airlines are scrambling. They're falling over industry slowdown. But since the attacks, which involved themselves” to entice customers back, she said. four hijacked planes, many airlines are convinced that Many bargains are being offered quietly by Southwest people are not ready to return to the skies at any price. Airlines and other aggressive low-fare carriers in markets “Emotions are so high today that even a $99 coast-to- away from the major hubs. Last week, one small carrier, coast fare wouldn't do anything,” said an executive at a National Airlines, which has about 50 flights a day, began major carrier who spoke on the condition of anonymity. offering round-trip fares as low as $25 between Las Vegas “People need a few weeks to realize that we are not being and San Francisco and Los Angeles, or $75 between New attacked on a daily basis.” York City and Las Vegas. The major carriers have begun carrying out the 20 percent The major airlines have been cutting some fares on reductions in their schedules, which were announced last selected routes, often in response to their low-fare week to trim costs and to match reduced demand. Some are competitors. But they also are keeping a low profile about culling routes that were unprofitable before this month, or it. replacing large jets with smaller regional jets. But most are “They're not advcrtising thcm,” said Tom Parsons, thc simply reducing the number of flights on existing routes. president of Bestfares.com, an online travel site that spe- For example, both Delta Air Lines and US Airways have cializes in booking discount fares. “They're just loading reduced their hourly shuttles from Boston to New York, them into the computer reservations systems. They're really which totaled as many as 17 flights a day, to just four flights hoping to avoid starting a major fare war” that might spread a day each. competitively to the most lucrative business-travel routes Many airline executives and analysts acknowledged that from major hubs like New York, Chicago and Dallas. they are guessing about the future because no one can be sure when airline traffic will return, particularly the lucrative business travel market, and at what level. The Air International Herald Tribune Transport Association, the industry's trade group, predicted that industry sales will be down 40 percent during the fourth 26 September 2001, Page 2 quarter. Sometimes intuition isn’t right 10 “Apple Slips as Result of Hoarding Chips” WSJ, 30 Jan 1989 Apple Computer, which stockpiled hundreds of millions of dollars worth of precious memory chips during the height of a chip shortage last summer, said Friday that its strategy had backfired, and that as a result profit in its current quarter will fall by as much as 43%. Apple’s cost of memory is $120 higher than current spot prices on a basic model and $480 higher on a fully loaded machine. The purchasing blunder was the first misstep in what Apple’s chairman and chief executive office, John Sculley, concedes as “a series of internal management and marketing decisions that, in hindsight, weren’t very good decisions.” Subsequent price increases aimed at shoring up profit margins squeezed by the expensive memory chips boomeranged, as customers and dealers instead bought stripped-down models of Apple’s big-selling Macintosh computers and outfitted them with less-expensive additional memory chips and add-ons from other suppliers. Apple’s misguided price increases after buying the expensive DRAMS might have permanently harmed its future sales of fully loaded computers. Deborah A. Coleman, the former chief financial officer, proposed raising prices across the board last fall. She is currently on leave … and will return in July in a lesser role.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Page 6 Session 10 • Explicit Price Discrimination Session 10: Explicit Price Discrimination 11 1. How prices depend on the demand curve (wrap up of Topic 9). ✓ ➥ 2. Charging different prices to different market segments (Topic 10). 3. Roxy Theater Setting different prices for different market segments 12 Price-sensitivity effect for “before” and “after” demand curves (Topic 9) was derived from MR 1 = MR 2 . So we get the same conclusion here: Set a higher price for the segment with less elastic demand. We do not need to assume constant marginal cost. The key assumption is that the segments are served from a common production facility, and hence the marginal cost of a unit is the same for whichever segment gets it.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Page 7 Session 10 • Explicit Price Discrimination In which segment do you charge a higher price? 13 P d 1 ( P ) d 2 ( P ) Q In which segment do you charge a higher price? 14 P d 2 ( P ) d 1 ( P ) Q

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Page 8 Session 10 • Explicit Price Discrimination Roxy case 15 P P 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 d 1 ( P ) d 2 ( P ) 2 4 6 8 10 12 14 16 18 2 4 6 8 10 12 14 16 18 Q Q Wrap up on Topic 10 - Explicit Price Discrimination 16 Main point 1. Charge different prices to different groups of customers if possible and if the groups have different elasticities of demand. 2. Charge a higher price in the market with less elastic demand. On the course website, examples that illustrate … • Arbitrage need not be impossible. • Consumer attitudes toward price discrimination. • What do regulatory authorities say?

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Page 9 Session 10 • Explicit Price Discrimination Where are we? 17 Firms are price-takers Firms have market power (Perfect competition) (Imperfect competition) (Sessions 1–6) Individual Equilibrium decisions (Sessions 12–15) Uniform Price pricing discrimination (Sessions 7–9) (Sessions 10–11) 18 Price discrimination Topic 10 – Explicit Price Discrimination Called 3rd-Degree Price Discimination in most texts 1. What? When? How? 2. Bottom line: Charge higher price to segment with less elastic demand. Topic 11 – Implicit Price Discrimination (Screening) Not covered by most texts 1. Perfect price discrimination (benchmark) 2. Screening via differentiated products 3. Bundling Market power games start Mon or Tue. You will receive details by email over the weekend.