Chapter 11 Pricing w/Mkt Power Will cover 11.1 and Goal of firms with market power: capture CS and convert it to profits. Issue: HOW firms with mkt power set prices to achieve this goal? Key: if exists single mkt P, then some buyers willing to pay more than actually paying. Solution: charge different prices to different consumers; also called price discrimination.

Three Types of Price Discrimination 1 st Degree Price Discrimination: –Extracts ALL the consumer surplus by charging each buyer exactly the amount he is willing to pay. 2 nd Degree PD: –Known as block pricing: selling first few Q at one price, next few Q at another price, etc. (discount for buying large quantity). 3 rd Degree PD: –Most common: dividing consumers into 2+ groups, each with own demand curve; charge different price to each group. –Examples: airline pricing; movies.

More on 3 rd Degree Price Discrimination Key: Must be able to identify the different groups and then keep them separate (I.e., enforce the different prices). Firm’s process to pick different P’s and Q’s: –Pick total Q such that: MR 1 = MR 2 = MC. Note: Charge higher price to the group with the lower price elasticity of demand.

Firm’s Approach when Using 3 rd Degree PD To start: One MC curve, two demand curves (so two MR curves). See Figure Approach: –1. Sum MR 1 + MR 2 = MR T. –2. Pick Q T where MR T = MC. –3. At this MR T, find Q 1 on MR 1 and Q 2 on MR 2. –4. Find P 1 off of D 1 at Q 1 and find P 2 off of D 2 at Q 2.