ECON 325

In Class Exercise Eight – Price Structuring (Part Two)

 

1.  If there is cost difference of $10 between offering a service to one customer vs. another but the price difference charged is $15, is that price discrimination?

 

 

 

 

 

2.  What is the difference between first, second and third degree price discrimination?

 

 

 

 

 

 

 

 

 

3.  Block Booking Case (variation of a tie-in sale):

 

Assume there are two movies put out by a movie production company.  One is a "big hit" and the other is a "so-so" movie.

 

There are two theatres:  Nighthouse and Dayhouse

 

The maximum prices they will pay per week for films are: (BH = big hit, SS = so-so)

 

Nighthouse:  $12,000 = PriceBH, $3,000 = PriceSS

Dayhouse:  $8,000 = PriceBH, $4,000 = PriceSS

 

Nighthouse will pay more for BH than Dayhouse, but less for SS.

 

a.   If the movies are sold separately at a uniform price (same price to both theatres), at what price must they sell?  How much revenue would the movie production company make (if these are the only two customers)?

 

 

 

b.  If block booked - would the movie house make more or less?  Explain.

 

 

 

 

c.  Explain why this is considered price discrimination.

 

 

 

 

 

4.  Coupons and trading stamps are forms of price discrimination.  Explain why the following would be predicted by economists:

 

a.  Coupons and trading stamps would be used by a seller relatively less often in cases where the total value of a single purchase is large.

 

 

 

 

b.  In cases where the commodity is personal service, relatively fewer trading stamps and coupons would be used.

 

 

 

 

c.  Owner-operated stores will use relatively fewer trading stamps and coupons than stores employing a large number of sales personnel.

 

 

 

5.  Explain why Heinz ketchup served in restaurants are marked "Not for Retail Sale."

 

 

 

 

6.  Suppose a firm sells computers and monitors, but that different consumers value the different products differently.

 

Consumer

Valuation of computer

Valuation of Monitor

1

2

$2000

$1500

$200

$300

 

Suppose, for simplicity that MC equals zero. 

If demand consisted of only these two consumers, then the best the firm could do with a single product, nondiscriminatory price is $________________ for the computers, and $_______________for the monitors.  Explain your answer.

 

However, if the firm tied in the sale of the monitor with the computer and charged $_________________ for the computer/monitor combination, it could earn $__________________ more per sale.  Explain your answer.

 

Would first-degree price discrimination be more profitable if the seller could do it?  Explain. 

Why don't they do first degree?

 

7.  In the United States, 1984 legislation permitted certification of generic drugs as "therapeutically equivalent" to the branded version without expensive and lengthy testing.  Since production costs are generally low (compared to R&D costs), generic drugs present competition for the former patent-protected brand name drugs.  A study by a couple of economists of 18 drugs subject to generic competition after the 1984 act documented the rapid market share erosion caused by generic entry.  Generics generally captured 50% of the market within two years of entry.  However, even while generic prices were falling, brand name prices actually rose.  Provide an explanation for this puzzling phenomenon.  Hint:  this is a question about price discrimination (after all, drug companies provide both brand name and generic drugs).  Don't talk about costs in your answer! 

 

 

 

 

 

 

 

 

 

 

 

 

 

8.  Typically, car rental agencies charge much higher prices for gasoline than that at nearby gas stations.  Explain how this indirectly segments between drivers who are paying for a rental themselves and those who are renting at the expense of others? 

 

 

 

 

 

 

 

 

 

 

9.  Do you have any other questions over this material?