1. Price Discrimination 1:G - 1(55) Entertainment and Media: Markets and Economics Price Discrimination

2. 1:G - 2(55) Pricing and Value from the Consumer’s Viewpoint Market prices and willingness to pay

3. Price Discrimination 1:G - 3(55) Perfect Price Discrimination  First degree discrimination  Every consumer pays their reservation price  The seller extracts all surplus value  Profit is maximized absolutely; This hypothetical situation is the best the seller could possibly do. Price Quantity Demand Marginal Cost

4. Price Discrimination 1:G - 4(55) Attempt to apply first degree price discrimination  Yield Management: A form of price discrimination Fixed, perishable product Low (or zero) marginal cost Segmentable markets  Applications Airlines: Timing of sales; fare classes Hotels: Timing of sales, length of stay Car Rental: Insurance and damage waivers, upgrades Sports: Quality of seats for dozens of configurations Concerts: Bundling, backstage passes Online sales (attempts, e.g., Amazon)

5. Price Discrimination 1:G - 5(55) A General Rule for Price Discrimination (Strategic Pricing)  Extract consumer surplus where there are opportunities  Greater profit extracted from the less elastic buyer  Rule: (Price – Marginal Cost)/Price  = price cost (profit) margin  = 1 / |Price Elasticity|  Generally means higher prices charged to less elastic demanders

6. Price Discrimination 1:G - 6(55) Market Segmentation  Different prices to different buyers of the same commodity  Making it work  There must be real segments  The segments must be kept apart – no sales across segments  Examples of market segmentation by elasticity  Senior citizen discounts at movies  Men’s and women’s shirts at dry cleaners

7. Price Discrimination 1:G - 7(55) Third Degree Price Discrimination: Monopoly pricing in each segment Inelastic Market Segment:Movies; General Admission Elastic Market Segment: Movies; Kids, Seniors P,MC P HIGH P LOW Tickets

8. Price Discrimination 1:G - 8(55) Market Segmentation For every single price regime, there is a two price regime that is more profitable. (Assuming market segments exist.) Separable Markets; Assume MC = 5. One Price = 8, Revenue = 8(4)+8(28)=256 Profit = 256-5(32) = 96 Two Prices: PL=5, Revenue=50 PH=11, Revenue=242 Total Revenue=292 Profit = 292-5(32) = 132

9. Price Discrimination 1:G - 9(55) Two Segment Market Why do the elasticities differ? How can North Holland prevent arbitrage?

10. Price Discrimination 1:G - 10(55) Two Price Regime at Amazon Prime

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12. Price Discrimination 1:G - 12(55) Magic Pricing Kingdom

13. Price Discrimination 1:G - 13(55) Dynamic Pricing Elements of pricing by attributes. Attributes change over time and elasticities change when they do.

14. Price Discrimination 1:G - 14(55) Time of Purchase Another tactic implemented by the airline industry is changing prices based on the time of day. They do this using analytics to determine the time of day at which most of their customers are purchasing tickets and charge higher prices at those times. This allows them to increase revenue and tailor their prices to the demand on the site. It is a little known secret that Amazon uses similar techniques and changes their prices multiple times a day to match the demand for an item. This type of variable pricing is harder to use than the other two because it requires constant monitoring to determine the appropriate price. Amazon and others have developed algorithms that do this for them and as these algorithms improve it is likely that more businesses will use time based pricing. http://spinnakr.com/blog/ideas/2013/08/variable-pricing-models-work-for-tech-startups/ D ynamic pricing might also work for commodities priced on the internet. Pure dynamic pricing: Elasticity varies by time (over day, week, season).

15. Price Discrimination 1:G - 15(55) Since 2011, the show’s producers, Disney Theatrical Productions, have been relying on a previously undisclosed computer algorithm to recommend the highest ticket prices that audiences would be likely to pay for each of the 1,700 seats at every performance in the Minskoff Theater. While other shows also employ this so-called dynamic pricing system to raise seat prices during tourist-heavy holiday weeks, only Disney has reached the level of sophistication achieved in the airline and hotel industries by continually using its algorithm to calibrate prices based on demand and ticket purchasing patterns.

16. Price Discrimination 1:G - 16(55) Second Degree Price Discrimination  Quantity discounts  Smaller purchaser generally has the less elastic demand.  Applications:  Groceries  Multiple site theme parks (Disney)

17. Price Discrimination 1:G - 17(55) Quantity Discounts at Disney World Number of Parks

18. Price Discrimination 1:G - 18(55) Quantity Discounts at Disney World Number of Days

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22. Price Discrimination 1:G - 22(55) Market Segmentation by Attributes Differentiation by product attributes  Key element: Price difference exceeds marginal cost difference  Less precise than direct segmentation by identifiable characteristics of buyers  Applications  Special seats in Manhattan movies  Versions of software  Books: Hardcover vs. paperback  Concert seats  Tickets to all sorts of entertainment events  Ticket Pricing by “Value”

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28. Price Discrimination 1:G - 28(55) Price Discrimination in Concerts. About 5% impact on gross revenues Discrimination defined as more than a single ticket price, e.g., floor vs. bleacher. Frequency of price discrimination for acts with > 300 concerts. The Impact of Price Discrimination on Revenue: Evidence from the Concert Industry, P.Courty and M. Pagliero, Review of Economics and Statistics, 94, 2012, 359-369.

29. Price Discrimination 1:G - 29(55)  Black Mac $1499  White Mac $1349 What was going on here? Real Differences in Aesthetics Not Proportional to Marginal Cost

30. Price Discrimination 1:G - 30(55) $85 includes license fee for Yankees lid. The license fee is less than $85/computer. $0 for black. $40 for Pink, Red, Blue, Green, Purple. The marginal cost of the different colors is close to zero. Notice the marketing; not Green, “Jade Green.”

31. Price Discrimination 1:G - 31(55) High Flying Price Discrimination

32. Price Discrimination 1:G - 32(55) Real Functional Differences Not Proportional to Marginal Cost $300 for 2GB of memory and 90GB on the hard drive. Marginal cost near zero.

33. Price Discrimination 1:G - 33(55) “Business Class” for movie goers

34. Price Discrimination 1:G - 34(55) More Price Discrimination

35. Price Discrimination 1:G - 35(55) The Producers Price Index Price discrimination based on two attributes, seat location and day/time. Further promotional discounts, day of show via TKTS = 3 rd dimension of discrimination based on risk of not seeing the show. Estimated impact on theater profit (compared to a 1 price strategy) 5% Price discrimination in Broadway theater, Phillip Leslie, http://www.stanford.edu/~pleslie/broadway.pdf

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37. Price Discrimination 1:G - 37(55) 1. Place of the seat relative to the stage. 2. Programming 3. Time and date of the show 4. Time of purchase

38. Price Discrimination 1:G - 38(55) 2003 Mets Price Experiment

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42. Price Discrimination 1:G - 42(55) Yankee Stadium Pricing

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44. Price Discrimination 1:G - 44(55) Pricing Downloads

45. Price Discrimination 1:G - 45(55) Hard Cover US v UK Version; 9/13/07 ₤50.34 = $102.30

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47. Price Discrimination 1:G - 47(55) International Pirated Edition: Very Low Price! Renmin University of China All 827 pages

48. Price Discrimination 1:G - 48(55) Cannibalization  Two level pricing system – the lower level may cannibalize the higher one If the two prices are too far apart, the surplus from the lower priced alternative may exceed that from the higher one. Potential inelastic (high price) buyers may be drawn to the lower priced segment.  Strategies Careful setting of the difference between high and low prices When segmenting by attributes, ensure that the attributes create real perceptible differences that consumers will value.

49. Price Discrimination 1:G - 49(55) Lion King, Orpheum, SF Segmentation by Attributes

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51. Price Discrimination 1:G - 51(55) Bundling  Applications  Cable TV Basic Basic+Premium+Music Choice  Econometric Analysis 6 th ed. with answers  What is the strategy? (Not specific to experience goods: Phone services Car features

52. Price Discrimination 1:G - 52(55) Time Warner Cable Bundles

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55. Price Discrimination 1:G - 55(55) THE Bundling Application  Block booking by the movie studios Forced rental of sets of movies Blockbusters were bundled with dogs  THE PARAMOUNT CASE (1948) Broke up vertical arrangements (studios owning theaters) Disallowed block booking