Questions and Answers
A business that price-discriminates will generally charge some customers higher prices than other customers.
True
Who probably has a more inelastic demand for one of Grady's pickups?
Fred
Who probably has more elastic demand for a Hertz rental car: someone who reserves a car online weeks before a trip or someone who walks up to a Hertz counter after a 4-hour flight?
The person who booked in advance
How does easy arbitrage affect the ability of a firm to price-discriminate?
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Price discrimination is more likely to occur in monopoly-type markets than in competitive markets.
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What would you call the form of price discrimination used by razors with disposable heads?
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In the context of price discrimination, which group does likely fit as more price-sensitive among lunch consumers?
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What is the main difference between customers who use coupons and those who don't at a dry cleaner?
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Did firms find it easier to price-discriminate before the existence of eBay or after?
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How will drug companies change the prices they charge in Latin America and Africa if U.S. laws pass allowing easier import of drugs?
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How would you describe Walmart's power over convenience shoppers versus bargain shoppers?
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Bundling is more likely to occur in industries where fixed costs are high and marginal costs are low.
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When is a pharmaceutical company more likely to invest in research for a new drug?
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A price-discriminating business will be willing to spend money to make a product better.
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What is the profit-maximizing price for senior citizens at Paradise Grille?
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What 'Senior Citizen Discount' would you offer if the profit-maximizing price is set at $30?
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How much profit would Paradise Grille make if it could price-discriminate?
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Who buys each channel if the prices for Lifetime and the Food Network are set at $10 and $7, respectively?
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How much profit is there under á la carte pricing with no fixed costs?
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What is total consumer surplus under á la carte pricing for the three consumers?
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How much consumer surplus and profit will the firm make under bundling with a profit-maximizing bundle price of $12?
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What type of movie should Warner Bros. make according to the analysis?
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What project should Warner Bros. green-light given the costs of different films?
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Study Notes
Price Discrimination Basics
- A business engaging in price discrimination typically charges different prices to different customers based on their willingness to pay.
- Price discrimination is more prevalent in monopolistic markets compared to competitive ones.
- Firms often segment customers into price-sensitive (elastic demand) and less price-sensitive (inelastic demand) groups for effective pricing strategies.
Demand Elasticity
- Fred has more inelastic demand for pickups at Grady's Used Pickups compared to Lamont, who shops around.
- Customers who book rental cars in advance exhibit more elastic demand compared to those who make last-minute purchases.
Influence of Arbitrage
- The presence of easy arbitrage hinders a firm’s ability to price-discriminate by allowing customers with lower willingness to pay to access lower prices.
- Consumers with elastic demand are more likely to get priced out of markets where arbitrage is effective.
Bundle Pricing and Discounts
- Bundling occurs when products are sold together, often yielding higher revenue due to consumer preferences for distinct products.
- Gillette utilizes a tying strategy with its razor products, benefiting more from refill sales.
- Senior Citizen Discounts can be calculated based on the difference between profit-maximizing prices for different consumer groups.
Consumer Behavior and Decisions
- Consumer coupon usage indicates demand elasticity; those who use coupons generally exhibit more elastic demand.
- Under price discrimination, firms may invest in product improvements, while also potentially decreasing product quality for cost savings.
Profit Maximization Scenarios
- The Paradise Grille restaurant achieves specific profit-maximizing prices of $30 for seniors and $55 for regular diners, with a total profit potential of $2,825 when able to price-discriminate.
- For cable TV pricing, Alex and Tyler would purchase Lifetime, while Monique would choose the Food Network; prices set at $10 and $7 respectively yield a total consumer surplus of $7.
Film Production Decisions
- Warner Bros. should opt to produce the action-romance hybrid movie to maximize their audience and profits. This decision holds even when considering the costs associated with producing different types of films.
- A fixed ticket price of $8 and a marginal cost of zero simplifies the decision-making process, leading to a clear preference for the hybrid movie with respect to demand from target segments.
Conclusion
- Understanding consumer motivations and market dynamics is crucial to effective price discrimination and maximizing revenue and profits in various business models.
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Description
Test your understanding of pricing strategies and price discrimination concepts from Economics Chapter 14. This quiz features key scenarios and definitions to help reinforce your knowledge in this area of economic theory.
