Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
No.
Full name
Student ID
1201016104
1201016111
Phm Th Thanh H
1201016128
1201016143
1201016195
1201016197
1201016211
Trn Hunh i Lm
1201016230
1201016239
Bi ng Minh
1201016287
10
A
Monopoly =7
price
Profits = $12
C
MC = AC
MR
10
P
10
Consumer surplus = 0
Fixed fee = $24.5 = profits
C
MC = AC
10
With this pricing strategy, the firm can extract additional surplus from the
consumers and enhance its profits simultaneously.
1.2. Further problems
1.2.1.
Two-part pricing when consumer demand is homogeneous
When consumers have homogeneous demand, any one consumer is representative of the
consumer
no economic profit but producing an allocatively efficient output
- If the firm is a non-price discriminating monopolist, it would charge price Pm per unit and
supply Qm maximizing profit but producing below the allocatively efficient level of
output Qc.
Economic profit for the firm: the green area B, consumer surplus: to the light blue area A,
-
The firm would like to follow the same logic as before and charge a per-unit price of P c
while imposing a lump-sum fee equal to area ABCD - the largest consumer surplus of the
two consumers
The firm will be pricing consumer X out of the market
- A solution to pricing consumer X out of the market is equal to charge P c per unit. Profit in
this instance equals twice the area AC (two consumers): 2 x AC=ABCD
The profit is the same and the producer is indifferent to either of these pricing
-
possibilities
It can be seen that applying two-part pricing in doing business may arise the risk of
increasing administrative and management costs, because the firm, if it wants to enhance
the profits efficiently, needs to narrow the target market, in order to set the appropriate
needs to consider when applying two-part pricing strategy. Particularly, there are several
examples of twopart pricing strategy used in amusement parks, museums, bookstores,
telephone services and access to website information. It can be said that two-part pricing
is also used in those markets, where producers charge a lump sum to a retailer for the
right to carry their products plus a constant charge per unit ordered by the retailer.
Recently, two-part pricing can also be seen in several technology licensing agreements,
which specifies a fixed fee and a royalty for each unit produced.
1.3.2.
Real life examples
Disneylands admission fee
This is a classic example of two-part pricing strategy, which was analyzed in the
article written by Walter Oi in 1971. Disneyland is said to maximize it profits by setting
prices for admission to the theme park and for individual rides.
Applying the two-part pricing strategy, when considering all visitors are identical,
the optimal strategy is to sell rides at the price equated to marginal cost. In case that the
consumers tastes are different and the parks management board can realize the relation
in the population between rides demanded and consumer surplus, it is able to set two
different prices, where Disneyland can still enhance its profits. This means that the perunit price of each individual ride is the same for all visitors. However, each visitor would
be charged a different fixed admission fee that converts his entire consumer surplus into
Disneylands profits.
Polaroid camera and Polaroid film
Polaroid Corporation introduced its SX-70 instant camera, which uses the film
made exclusively by Polaroid. With this product, Polaroid used two-part pricing strategy
for pricing of camera and film. This allowed them to create greater profits than it would
have been possible if camera used ordinary film, which can be produced by any other
firms. It can be seen that buying the camera is like the entrance ticket of Disneyland,
which allows the consumers to buy and use the film and camera. However, unlike the
theme park, the marginal cost of providing an additional camera is considerably higher
than zero. The articles concerning this pricing strategy argued that it was necessary for
Polaroid to have monopoly for two reasons: first, if Polaroid camera could work with
ordinary film, the price of film would be close to marginal cost; second, when launching
Polaroid camera, Polaroid Corporation needed to make most of its profits from the sale of
film. In the end, the films price was significantly above marginal cost and there was
considerable heterogeneity of consumer demands.
2. Block pricing
2.1. Brief explanation
2.1.1.
Definition
Block pricing is the practice of charging different prices for different amount or
block of a good service, such as selling a package of eight paper rolls or a six-pack of
beer. The idea behind block pricing is to charge a package price that includes some
consumer surplus.
2.1.2.
supermarket purchase paper rolls from a distributor for 0,1 $ each. The inverse demand
equation of a typical customer is
P = 0.3 0.025Q
Suppose the manager adopts a one-price strategy. To maximize profit, the manager
should charge a price such that MR=MC. The supermarket's marginal revenue equation is
MR = 0.3 0.05Q
Since MC=0.1, the supermarket should charge P=0.2 per roll and sell Q=4 rolls per
buyer. The supermarket's per customer operation profit is
TR TVC = 0.4
Now, suppose the manager adopts a block pricing strategy by selling multiple paper
rolls in a package. How many rolls should be included in the package, and at what price?
What is the supermarket's per customer operating profit? The answers to this question are
illustrated in Figure 2.1 below.
To determine the number of paper rolls in each package, equate price in P= 0.3
0.025Q to marginal cost. Solving, the optimal number of paper rolls per package is Q=8.
The price charge per package equals to the total value received by the buyer, which is
given by the shaded area in the figure. which is equal to the sum of consumer surplus and
total variable cost. In this example, the price per package is
TR=0.5(0.3 - 0.1) 8 + 0.1 x 8 = 1.6
The supermarkets operating profit equals consumer surplus of TR TVC= 1.6 0.8 = 0.8 which is 0.4 greater than the operating profit when selling paper rolls one at a
time.
Figure 2.1. Block pricing
8
P
0.2
MC
0.1
0
MR
4
10
2.3. Application
Market with somewhat standardized and necessary products such as toilet papers,
instant noodles. Some real-life examples which can be easily recognized are
supermarkets, grocery stores
3. Comparison between two strategies
Benefit
Two-part pricing
Blocking pricing
Allow firms to gain larger profits than they normally would at the monopoly price
The firms extract more of the consumer surplus by The firms extract the maximum
charging a fixed fee equal to the total consumer
9
to ensure that the surplus is as large as possible.
Environment
receive.
Block pricing is frequently
retail
parks,
consumers. An example is a
package
line rental.
markets,
including
amusement
of
toilet
paper.