This document discusses different pricing techniques used by firms, including uniform pricing and various forms of price discrimination. It provides details on three types of price discrimination: first-degree, second-degree, and third-degree price discrimination. First-degree discrimination involves setting an individual price for every unit sold. Second-degree discrimination uses quantity discounts or two-part pricing. Third-degree discrimination charges different prices to different groups of customers based on differences in demand elasticities between markets. The goal of price discrimination is for firms to capture more consumer surplus and be more profitable.

1. Chapter 14Advanced Pricing Techniques

2. 14-2Capturing Consumer SurplusUniform pricingCharging the same price for every unit of the productPrice discriminationMore profitable alternative to uniform pricingMarket conditions must allow this practice to be profitably executedTechnique of charging different prices for the same productUsed to capture consumer surplus (turning consumer surplus into profit)

3. 14-3The Trouble with Uniform Pricing(Figure 14.1)

4. 14-4Price Discrimination Three conditions necessary to practice price discrimination profitably:Firm must possess some degree of market powerA cost-effective means of preventing resale between lower- and higher-price buyers (consumer arbitrage) must be implementedPrice elasticities must differ between individual buyers or groups of buyers

5. 14-5First-Degree (Perfect) Price DiscriminationEvery unit is sold for the maximum price each consumer is willing to payAllows the firm to capture entire consumer surplusDifficultiesRequires precise knowledge about every buyer’s demand for the goodSeller must negotiate a different price for every unit sold to every buyer

6. 14-6First-Degree (Perfect) Price Discrimination (Figure 14.2)

7. 14-7Second-Degree Price DiscriminationLower prices are offered for larger quantities and buyers can self-select the price by choosing how much to buyWhen the same consumer buys more than one unit of a good or service at a time, the marginal value placed on additional units declines as more units are consumed

8. 14-8Second-Degree Price DiscriminationTwo-part pricingCharges buyers a fixed access charge (A) to purchase as many units as they wish for a constant fee (f) per unitTotal expenditure (TE) for q units is:

9. 14-9Second-Degree Price DiscriminationWhen consumers have identical demands, entire consumer surplus can be captured by:Setting f = MCSetting A = consumer surplus (CS)Optimal usage fee when two groups of buyers have identical demands is the level for which MRf = MCf

10. 14-10Third-Degree Price DiscriminationIf a firm sells in two markets, 1 & 2Allocate output (sales) so MR1 = MR2Optimal total output is that for which MRT = MCFor profit-maximization, allocate sales of total output so thatMRT = MC = MR1 = MR2

11. 14-11Third-Degree Price DiscriminationEqual-marginal-revenue principleAllocating output (sales) so MR1 = MR2 which will maximize total revenue for the firm (TR1 + TR2)More elastic market gets lower priceLess elastic market gets higher price