Consider for example the eﬀects of firms oﬀering two-part tariﬀs instead of linear prices.
(This discussion assumes that consumers buy all supplies from one firm or the other, i.e., there is “one-stop shopping”.) With linear pricing, firms’ prices will be close to their marginal costs if the market is competitive, and prices will be higher when the firms have more market power. When firms oﬀer two-part tariﬀs their marginal prices will usually be lower than when linear prices are employed. For instance, in the special case where all consumers have the same demand function, firms will sets marginal prices exactly equal to marginal cost, since that is the most profitable method for a firm to deliver a particular level of consumer surplus. Total welfare often increases if two-part tariﬀs are used instead of linear prices, since the marginal price falls to cost. With more intricate analysis one can also show that profit increases with this form of pricediscrimination, while consumers are typically worse oﬀ. 11 Thus, this competitive setting resembles the monopoly setting with two-part tariﬀs just discussed: welfare and profits increase but consumers are harmed by the use of two-part tariﬀs. The main eﬀect of competition here is that consumer surplus is no longer driven down to zero when two-part tariﬀs are used. To confuse the issue, though, we will see alternative situations in section 7 where the reverse happens: when competing firms know everything about consumer tastes and price accordingly, firms are harmed and all consumers are better oﬀ.
Non-linear pricing and quantity discounts (surcharges)
Thus, in practice, pricediscrimination much less perfect One way firms commonly do this is non-linear tariffs
Different prices for different numbers of units Often choice of different discrete bundles Examples of this (typically discount) abound?
Consider for example the eﬀects of ﬁ rms oﬀering two-part tariﬀs instead of linear prices.
(This discussion assumes that consumers buy all supplies from one ﬁ rm or the other, i.e., there is “one-stop shopping”.) With linear pricing, ﬁrms’ prices will be close to their marginal costs if the market is competitive, and prices will be higher when the ﬁ rms have more market power. When ﬁ rms oﬀer two-part tariﬀs their marginal prices will usually be lower than when linear prices are employed. For instance, in the special case where all consumers have the same demand function, ﬁ rms will sets marginal prices exactly equal to marginal cost, since that is the most pro ﬁ table method for a ﬁ rm to deliver a particular level of consumer surplus. Total welfare often increases if two-part tariﬀs are used instead of linear prices, since the marginal price falls to cost. With more intricate analysis one can also show that pro ﬁ t increases with this form of pricediscrimination, while consumers are typically worse oﬀ. 11 Thus, this competitive setting resembles the monopoly setting with two-part tariﬀs just discussed: welfare and pro ﬁ ts increase but consumers are harmed by the use of two-part tariﬀs. The main eﬀect of competition here is that consumer surplus is no longer driven down to zero when two-part tariﬀs are used. To confuse the issue, though, we will see alternative situations in section 7 where the reverse happens: when competing ﬁ rms know everything about consumer tastes and price accordingly, ﬁ rms are harmed and all consumers are better oﬀ.
Second-Degree pricediscrimination – The monopolist has incomplete information, he knows that there are different types of consumers and knows their tastes but cannot tell them apart ex-ante, i.e. before purchase. He must use self-selection devices to set the right price- quantity or price-quality packages.
TYPES OF PRICEDISCRIMINATION:
First-degree discrimination : It is charging whatever price the market will bear. Sometimes known as optimal pricing , with perfect pricediscrimination, the firm separates the whole market into each individual consumer and charges them the price they are willing and able to pay. If successful, the firm can extract all consumer surpluses that lie beneath the demand curve and turn it into extra producer revenue (or producer surplus). This is impossible to achieve unless the firm knows every consumers preferences and, as a result, is unlikely to occur in the real world. The transactions costs involved in finding out through market research what each buyer i s prepared to pay is the main block or barri er to a businesses engaging in this form of pricediscrimination.
discrimination, where different products are priced in a
In simple monopoly, where the monopolist charges a single price from all buyers for reasons not associated with differences in costs. At times, the monopolist is in a position to charge different prices for the same product. This behavior of monopolist is termed as pricediscrimination and this type of monopoly is referred to as discriminatory monopoly. In the words of Joan Robinson, the act of selling the same article, product under a single control, at different prices to different buyers is known as pricediscrimination". A monopolist resorts to pricediscrimination, whenever it is possible and profitable to do so. Thus, pricediscrimination is a special case of monopoly. It is different from price differentiation, where the difference in price may be equal to the difference in the cost.
In this paper we examine the welfare effects of monopoly and pricediscrimination in the marketing of biotechnology discoveries. Two main issues are exam- ined. The first issue is the general case of the distribu- tion of benefits when the attempt to price discriminate is added to the effect of intellectual property rights (IPR)- induced monopoly power. Secondly, the effect of pricediscrimination on the availability of technology in small markets is examined. We demonstrate that even though pricediscrimination is often considered to be an unwanted market distortion, it may increase total wel- fare by increasing total output and by making goods available in markets where they would not appear other- wise. The policy implication is that in some cases, allowing pricediscrimination may be a desirable policy for encouraging private-sector investment in small mar- kets. Several empirical studies have shown that farmers can receive significant benefits from private-sector pro-
Marginal consumers, in contrast, benefit from firms competing within the framework of a finer access system. Firms can gain a competitive advantage by obtaining the finer access system in exclusivity and extracting consumer surplus by treating different consumers differently.
Firms have an incentive to use finer segmentations and to make customized offers even when the implied additional marketing costs (due to returns to scale in marketing) are larger than the value created for consumers through product customization. When such is the case, an intermediary can profitably supply market coarsening, sharing the consumer surplus it helps to restore. These findings highlight the limits of assuming that profit-driven firms are in charge of commanding segmentation and pricediscrimination processes in their best interest, as commonly taught to students of marketing. Analysis also found that when the drive for consumer exposure dominates privacy concerns, finer access should always be negotiated in exclusivity with one firm.
Our model allows the monopolist not only to set prices conditional on evidence, but to sell lotteries that deliver the object with some probability. Probabilistic sale can be interpreted as delay or quality degradation. 1 Thus, our model entails a mixture of second and third degree pricediscrimination. Evidence and, moreover, voluntary presentation of evidence play a crucial role in generating the richness of the optimal mechanism. In the absence of all evidence, the optimal mechanism is a posted price. When segments are transparent to the seller, which corresponds to the case where evidence disclosure is non-voluntary or where all consumers can prove membership and the lack of it for all segments, the optimal mechanism in our setting is standard third degree pricediscrimination. More generally, segments may not be transparent, and some consumers may not be able to prove that they do not belong to certain segments. For example, how does one prove that one is not a student? In this case, the optimal mechanism must determine prices for lotteries as a function of submitted evidence. The same lottery may sell to different types for different prices.
discrimination has typically been seen as a tool by which a dominant firm exploits its power to shift surplus from consumers and thereby earn more profits. European competition law, and more precisely Article 82 of the EC Treaty, considers as an abuse the fact for one or several firms holding a dominant position of “applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage”. In this tradition pricediscrimination is typically considered to be unfair, because some buyers have to pay a higher price for an equivalent good or service than others, unless the price differential can be convincingly justified by reference to cost differences. However, it is often far from self-evident how to define fairness in relation to systems with individualized prices. Should, for example, “no discrimination” mean that the same price is applied to all customers despite the presence of cost differentials or should the cost differentials be borne by the customers? These issues are particularly difficult when universal service obligations are implemented, for example in cases related to public health care. In any case, it is unclear whether fairness arguments support uniform prices or discriminatory price schemes with individualized prices.
The main contribution of this work is to provide empirical evidence and a theoretical explanation for how the profitability of third degree pricediscrimination is affected by consumers’ fairness concerns. In our setting, different consumer groups are charged varying prices based on their characteristics and the motivation for charging varying prices is that consumers differ in their demand elasticities. As a new explanation for consumers’ behavioral reactions we propose that they form their price fairness judgments by comparing the material payoff they can obtain by purchasing from a firm with the material payoff that other consumers can obtain. Thus, we look at a three-player setting, stressing the importance of external self/other comparisons in the context of third degree pricediscrimination. With this framing we can explain the empirical findings that firms obtain higher profits by charging a weaker price differential than the one predicted to be optimal under standard theory, and further that firms’
We conduct a multivariate OLS analysis to estimate how firms’ profits are affected by consumers’ reciprocal reactions. As dependent variable we use the percentage dif- ferential between firms’ actual profits and firms’ profits under standard theory.
In assessing the impact of consumers’ reciprocal behavior on firms’ profits, we face the following difficulty. If consumers reduce their demand, this can either be seen as inequality-reducing behavior (following consumer/firm comparisons) or as reciprocal punishment (following consumer/consumer comparisons), given the firm price discrimi- nated and charged these consumers higher prices than other consumers. Similarly, when consumers increase their demand, this can either be seen as social-surplus-increasing behavior or as reciprocal reward, given the firm price discriminated and charged these consumers lower prices than other consumers. 7,8 While inequality-reducing behavior and social-surplus-increasing behavior may arise under both, pricediscrimination and non-pricediscrimination treatments, reciprocal behavior may only arise under price dis- crimination treatments. We want to focus on the reciprocity hypothesis and its ability to explain deviations from standard theory. Thus, in order to isolate the reciprocity effects we include dummy variables for all treatments as dependent variables into the regression with the exception of npd i1 (see Table 2). The regression then shows the additional behavioral effects that arise in the pricediscrimination treatments compared to the non-pricediscrimination treatment npd i1. We will interpret these additional effects as reciprocity effects. 9
view of the social value of pricediscrimination. I do believe that pricediscrimination may be desirable and in some cases copyright law should promote it, but there are other cases when pricediscrimination is undesirable and copyright law should discourage it.
My normative analysis of copyright law and pricediscrimination begins in Part IV with a description of the potential efficiency costs and benefits and distributional consequences of discrimination. 34 I evaluate specific cases and statutory provisions in Parts V and VI and provide answers to the questions at the beginning of the Article. Here is a preview of my answers. (1) The public performance right should have a fairly broad scope because it facilitates a desirable form of pricediscrimination that is likely to increase output. Furthermore, music and movie copyright owners would switch to a less efficient form of pricediscrimination absent the public performance right. (2) The importation right should not be used to control gray market goods and facilitate geographic pricediscrimination. This type of discrimination transfers wealth from American consumers to American producers while imposing significant implementation costs. I doubt these implementation costs are offset by social benefits flowing from output expansion or productive incentive. (3) The derivative right should be narrowed to exclude movie merchandise. Movie merchandising probably imposes allocative and implementation costs with little offsetting benefit in terms of creative incentive. (4) I am unable to decide whether systematic photocopying of scientific journal articles by a corporate should be a fair use. Finally, (5) I favor copyright preemption of consumer use restrictions applied to uncopyrightable database contracts, but I am unsure about the desirability of consumer use restrictions in copyright licenses.
We have argued that menus of non-linear pricing schemes in monopolistic environ- ments can be usefully interpreted as a consequence of the monopolist’s attempt to screen the consumer’s prior belief regarding his future willingness to pay. In particu- lar, we have demonstrated that in certain environments, pricediscrimination of this sort emerges only when the monopolist and the consumer have different priors. Fur- thermore, in some of our examples the consumer’s actions are independent of the pric- ing scheme he selects from the menu. In these cases, incentive provision cannot be the explanation for pricediscrimination. Rather, some of the pricing schemes on the menu are bets aimed at consumers whose prior beliefs are sufficiently different from the monopolist’s.
While these assumptions describe many markets well, 2 in other environments, including markets for financial assets or certain durable goods, competition from resale markets is pervasive, even if the original producer is a monopoly. Moreover, monitoring purchases is often prohibitively expensive and, even when given access to information on individual purchases, sellers may be unable (as a practical or legal matter) to prevent buyers from purchasing additional bundles or reselling the bundles they purchase. Consequently, in many markets, bundling that is based on discriminating between buyers via non-linear pricing is either impractical or unfeasible. This paper uncovers and characterizes a novel mechanism that can make bundling profitable, even in markets in which the assumptions behind non-linear pricing—namely, monitoring and no resale—are not satisfied. Thus, as a tool to increase profits, bundling need not rely on pricediscrimination.
higher profits. In a secondary market, the same efficiency gains are typically shared among consumers (who are able to find other consumers with higher valuations and make a mutually beneficial trades) and firms engaged in resale (ticket resellers, often disparaged as “scalpers”). Secondary markets allow for an additional form of second-degree pricediscrimination, where fans who value price certainty will tend to pay face value in advance in the primary market (but give up flexibility), and fans who are flexible can often get discounted seats close to game time. Sweeting (2008) explains that baseball ticket prices typically decline as the game approaches (a ticket is a perishable good and as the event draws closer there is an increased probability of not selling the ticket at all) for many of the same reasons that hotels and cruises will offer last minute discounts. On the other hand, Courty (2003) shows that some fans are uncertain as to their own valuation of attendance at an event and thus are willing to pay a premium to attend a desirable game without an advance commitment. These distinct pricing options are similar to the sort of second-degree pricing seen in air travel, where late-paying consumers may either get a bargain on a flight with low demand or may pay a very high price for the flexibility of purchasing a last-minute, unrestricted ticket. Secondary markets also play an efficiency role, making other forms of pricediscrimination function more smoothly. For example, secondary markets reduce the risk to early (first-sale) purchasers in a market, by providing a form of insurance to fans who purchase in advance, who thus know that if their plans change, the ticket can be sold, mitigating any losses and potentially providing for a profit. This is in stark contrast with the less efficient market for airlines tickets where resale is highly
This prevalence of new and complex pricediscrimination strategies has inspired intensive research in marketing, economics, and operations research. The work to date has started to shed light on substantive and methodological challenges in the choice of such strategies. Substantively, research aims to understand what drives customers’ offering and usage choices, how firms should structure pricing plans, and their impact on profitability and welfare. Methodologically, much of this research applies a canonical framework that assumes or estimates heterogeneous consumer tastes for products and derives or simulates optimal pricing strategies implied by that heterogeneity. However, complications in accurately modeling consumers’ choice decisions between alternative offerings arise from complex, often nonlinear, pricing structures. Furthermore, consumers’ uncertainty and learning introduces dynamics into their behavior over time and feedback effects can arise between price structures and both usage behavior and costs. Most of the literature relies on economic models of consumer decision-making, but recent research suggests that deviations from rational choice may significantly affect both consumers' and firms'
This paper builds a baseline two-country model of real and monetary transmission in the presence of optimal international pricediscrimination by firms. Distributing traded goods to consumers requires nontradables, intensive in local labor. Because of distributive trade the price elasticity of demand depends on country-specific shocks to productivity and the exchange rate. Hence, within limits dictated by the possibility of arbitrage, profit-maximizing monopolistic firms drive a wedge between prices across countries at both wholesale and retail level. Optimal pricing thus results in possibly large deviations from the law of one price and incomplete pass-through on import prices. Consistent with the received wisdom on international transmission, nominal and real depreciations worsens the terms of trade. In general, the nominal and real exchange rate are more volatile than fundamentals, and large movements in the international prices translate into small changes in consumption, employment and the price level. Finally, we provide an example showing that international policy cooperation may be redundant even when asset trading is ruled out, despite incomplete pass-through and less than optimal risk sharing.