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Intermediate Microeconomics


9. Pricing


Firms with market power, such as monopolies, are sometimes able to use nonuniform pricing to increase their profits. In particular, such firms can use price discrimination, quantity discrimination, two-part tariffs and tie-in sales to target consumers with different willingnesses to pay. It can be shown that nonuniform pricing benefits society, as larger quantities are sold than when a single price is charged. In the screencasts and pencasts in this series, the following types of nonuniform pricing are covered: perfect price discrimination, quantity discrimination, a comparison of single prices and block pricing, multimarket price discrimination, two-part tariffs when consumers have the same and different willingnesses to pay, tie-in sales and the decision to advertise and how much to invest in advertising.


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Nonuniform Pricing

This Screencast describes the differences between uniform and nonuniform prices. The many ways that a firm with market power can use nonuniform pricing are discussed. [Play ScreenCast]


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Price Discrimination

This Screencast describes the business practice of price discrimination as well as the conditions that are necessary for a firm to be able to charge different prices to different consumers. [Play ScreenCast]


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Welfare Effects of Perfect Price Discrimination

This Pencast uses the tool of welfare accounting to compare three different equilibria: competitive, single-price monopoly, and perfectly-price-discriminating monopoly. [Play Pencast]


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Quantity Discrimination

This Screencast describes the idea behind quantity discrimination, which is allowing the price to vary based on the units purchased. Block pricing, a form of quantity discrimination, is discussed. [Play ScreenCast]


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Quantity Discrimination: An Application

This Pencast provides an example of a how a monopoly firm that uses declining-block pricing sets their prices and, hence, maximizes profit. [Play Pencast]


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Single Price Versus Declining Block Pricing

This Pencast uses the tool of welfare accounting to show that quantity discrimination produces an outcome that is better for society than an equilibrium in which the monopoly charges only one price. [Play Pencast]


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Multimarket Price Discrimination

This Pencast shows that a monopolist that can separate its customer base into two group is able to set quantities and, hence, prices by equating the marginal revenues of each customer type to the marginal cost of production. It is also shown that the ratio of the prices charged depend on the relative elasticities of demand. [Play Pencast]


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Multimarket Price Discrimination: Resale is Not Possible

This Pencast provides an example using explicit-form functions to show the prices, quantities and profits earned from both consumer types when resale is banned. [Play Pencast]


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Multimarket Price Discrimination: Resale is Possible

This Pencast provides an example using explicit-form functions to show the price, quantity and profit earned from consumers when resale is allowed. When resale is possible, the monopoly cannot charge the two consumers different prices. [Play Pencast]


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Two-Part Tariffs

This Screencast discusses the idea behind a two-part tariff and the conditions that must be present for a firm to use such a pricing strategy. [Play ScreenCast]


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Two-Part Tariffs: An Application with Identical Consumers

This Pencast describes how a firm sets its lump-sum fee when all of its consumers have the same willingness to pay. [Play Pencast]


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Two-Part Tariffs: An Application with Non-Identical Consumers (Part I)

This Pencast sets up the problem faced by a monopolist that is trying to determine the price and how much of a lump-sum fee to charge its customers who have different willingneses to pay. [Play Pencast]


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Two-Part Tariffs: An Application with Non-Identical Consumers (Part II)

This Pencast shows how to compute the optimal lump-sum fee and price to be charged if the monopoly firm bases its decision off of the first consumer type (the one with the lower demand). [Play Pencast]


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Two-Part Tariffs: An Application with Non-Identical Consumers (Part III)

This Pencast shows how to compute the optimal lump-sum fee and price to be charged if the monopoly firm bases its decision off of the second consumer type (the one with the higher demand). [Play Pencast]


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Two-Part Tariffs: An Application with Non-Identical Consumers (Part IV)

This Pencast summarizes the conclusion from the analysis conducted in the previous two Pencasts (Parts II and III). [Play Pencast]


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Tie-In Sales

This Screencast discusses the concept of tie-in sales, and mentions the two types commonly used (i.e. requirement tie-in sales and bundling). Discussion is provided on the possible motives behind tie-in sales. [Play ScreenCast]


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Tie-In Sales: An Application

This Pencast provides an example of how tie-in sales apply to a business trying to sell two different but related products. [Play Pencast]


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Advertising: Whether to and How Much to Spend?

This Pencast illustrates when it is profitable for a monopoly to advertise and it shows how to determine how much a monopoly spends on advertising (assuming it is profitable to do so). It is shown that the monopoly should advertise until the marginal revenue from the last unit of advertising equals its cost. [Play Pencast]


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