ZeePedia

Monopsony Power:THE ECONOMICS OF COUPONS AND REBATES

<< Monopsony Power:Pricing With Market Power, Capturing Consumer Surplus
Airline Fares:Elasticities of Demand for Air Travel, The Two-Part Tariff >>
img
Microeconomics ­ECO402
VU
·
Lesson 35
Third Degree Price Discrimination
1) Divides the market into two-groups.
2) Each group has its own demand function.
3) Most common type of price discrimination.
­ Examples: airlines, vegetables, discounts to students and senior citizens.
4) Third-degree price discrimination is feasible when the seller can separate his/her
market into groups who have different price elasticities of demand.
(e.g. business air travelers versus vacation air travelers)
­ Objectives
­ MR1 = MR2
MC1 = MR1 and MC2 = MR2
­
­ MR1 = MR2 = MC
­
P1: price first group
­
P2: price second group
­
C(Qr) = total cost of QT = Q1 + Q2
­
Profit ( š ) = P1Q1 + P2Q2 - C(Qr)
­
Set incremental š for sales to group 1=0
Δ(PQ1)   ΔC
Δš
1
=
-
=0
ΔQ1
ΔQ1
ΔQ1
Δ( PQ1 )
ΔC
= MR1 -
= MC
1
ΔQ1
ΔQ1
­ Second group of customers: MR2 = MC
­ MR1 = MR2 = MC
­ Determining relative prices
Recall: MR = P (1 + 1/Ed)
Then : MR1 = P1 (1 + 1/E1) = MR2 = P2 (1 + 1/E2)
­
Determining relative prices
(1 + 1 E 2 )
P1
=
And
:
(1 + 1 E 1 )
P2
­ Pricing: Charge higher price to group with a low demand elasticity
­ Example: E1 = -2 & E2 = -4
(1 - 1 4 )
P1
=
= 3 4 1 2 = 1 .5
(1 - 1 2 )
P2
­ P1 should be 1.5 times as high as P2
163
img
Microeconomics ­ECO402
VU
Consumers are divided into
$/Q
two groups, with separate
demand curves for each
group.
MRT = MR1 + MR2
D2 = AR2
MRT
MR2
D1 = AR1
MR1
Quantity
QT: MC = MRT
MC = MR1 at Q1 and P1 ·
$/Q
·Group 1: P Q ; more elastic
1
1
·Group 2: P Q ; more
P1
2
2
inelastic
·MR = MR = MC C
1
2
P2
M
·Q control MC
T
D2 = AR2
MRT
MR2
D1 = AR1
MR1
Q1
Q2
QT
Quantity
No Sales to Smaller Market
Even if third-degree price discrimination is feasible, it doesn't always pay to sell to both groups
of consumers if marginal cost is rising.
Group one, with
$/Q
demand D1, are not
willing to pay enough
MC
for the good to
P
make price
discrimination profitable.
D2
MR2
D1
Quantity
MR1
Q*
164
img
Microeconomics ­ECO402
VU
THE ECONOMICS OF COUPONS AND REBATES
Price Discrimination
­  Those consumers who are more price elastic will tend to use the coupon/rebate more
often when they purchase the product than those consumers with a less elastic demand.
­  Coupons and rebate programs allow firms to price discriminate.
Price Elasticities of Demand for Users Versus Nonusers of Coupons
Price Elasticity
Product
Nonusers
Users
Toilet tissue
-0.60
-0.66
Stuffing/dressing
-0.71
-0.96
Shampoo
-0.84
-1.04
Cooking/salad oil
-1.22
-1.32
Dry mix dinner
-0.88
-1.09
Cake mix
-0.21
-0.43
Cat food
-0.49
-1.13
Frozen entrée
-0.60
-0.95
Gelatin
-0.97
-1.25
Spaghetti sauce
-1.65
-1.81
Crème rinse/conditioner
-0.82
-1.12
Soup
-1.05
-1.22
Hot dogs
-0.59
-0.77
Cake Mix
­  Nonusers of coupons: PE = -0.21
­  Users: PE = -0.43
Cake Mix Brand A
­ PE: 8 to 10 times cake mix PE
Example
­  PE Users: -4
­  PE Nonusers: -2
Using:
(1 + 1 E2 )
P
=
1
(1 + 1 E1 )
P2
165
img
Microeconomics ­ECO402
VU
Price of nonusers should be 1.5 times users
­  Or, if cake mix sells for $1.50, coupons should be 50 cents
166
Table of Contents:
  1. ECONOMICS:Themes of Microeconomics, Theories and Models
  2. Economics: Another Perspective, Factors of Production
  3. REAL VERSUS NOMINAL PRICES:SUPPLY AND DEMAND, The Demand Curve
  4. Changes in Market Equilibrium:Market for College Education
  5. Elasticities of supply and demand:The Demand for Gasoline
  6. Consumer Behavior:Consumer Preferences, Indifference curves
  7. CONSUMER PREFERENCES:Budget Constraints, Consumer Choice
  8. Note it is repeated:Consumer Preferences, Revealed Preferences
  9. MARGINAL UTILITY AND CONSUMER CHOICE:COST-OF-LIVING INDEXES
  10. Review of Consumer Equilibrium:INDIVIDUAL DEMAND, An Inferior Good
  11. Income & Substitution Effects:Determining the Market Demand Curve
  12. The Aggregate Demand For Wheat:NETWORK EXTERNALITIES
  13. Describing Risk:Unequal Probability Outcomes
  14. PREFERENCES TOWARD RISK:Risk Premium, Indifference Curve
  15. PREFERENCES TOWARD RISK:Reducing Risk, The Demand for Risky Assets
  16. The Technology of Production:Production Function for Food
  17. Production with Two Variable Inputs:Returns to Scale
  18. Measuring Cost: Which Costs Matter?:Cost in the Short Run
  19. A Firm’s Short-Run Costs ($):The Effect of Effluent Fees on Firms’ Input Choices
  20. Cost in the Long Run:Long-Run Cost with Economies & Diseconomies of Scale
  21. Production with Two Outputs--Economies of Scope:Cubic Cost Function
  22. Perfectly Competitive Markets:Choosing Output in Short Run
  23. A Competitive Firm Incurring Losses:Industry Supply in Short Run
  24. Elasticity of Market Supply:Producer Surplus for a Market
  25. Elasticity of Market Supply:Long-Run Competitive Equilibrium
  26. Elasticity of Market Supply:The Industry’s Long-Run Supply Curve
  27. Elasticity of Market Supply:Welfare loss if price is held below market-clearing level
  28. Price Supports:Supply Restrictions, Import Quotas and Tariffs
  29. The Sugar Quota:The Impact of a Tax or Subsidy, Subsidy
  30. Perfect Competition:Total, Marginal, and Average Revenue
  31. Perfect Competition:Effect of Excise Tax on Monopolist
  32. Monopoly:Elasticity of Demand and Price Markup, Sources of Monopoly Power
  33. The Social Costs of Monopoly Power:Price Regulation, Monopsony
  34. Monopsony Power:Pricing With Market Power, Capturing Consumer Surplus
  35. Monopsony Power:THE ECONOMICS OF COUPONS AND REBATES
  36. Airline Fares:Elasticities of Demand for Air Travel, The Two-Part Tariff
  37. Bundling:Consumption Decisions When Products are Bundled
  38. Bundling:Mixed Versus Pure Bundling, Effects of Advertising
  39. MONOPOLISTIC COMPETITION:Monopolistic Competition in the Market for Colas and Coffee
  40. OLIGOPOLY:Duopoly Example, Price Competition
  41. Competition Versus Collusion:The Prisoners’ Dilemma, Implications of the Prisoners
  42. COMPETITIVE FACTOR MARKETS:Marginal Revenue Product
  43. Competitive Factor Markets:The Demand for Jet Fuel
  44. Equilibrium in a Competitive Factor Market:Labor Market Equilibrium
  45. Factor Markets with Monopoly Power:Monopoly Power of Sellers of Labor