Chapter 10 Market Power and Pricing Strategies
CHAPTER 10:
MARKET POWER AND PRICING STRATEGY
Introduction
We have examined how firms with market power can generate positive economic profit by influencing the price at which their products or services are sold.
This conclusion was based on the assumption that firms must charge the same price to all customers.
Now we explore alternative pricing strategies and show that when a firm with market power can “discriminate” among customers, additional surplus (beyond that achieved by a single-price monopolist) can be generated.
Firms with market power behave in different ways than those in perfect competition.
10.1 – The Basics of Pricing Strategy
A pricing strategy is a firm’s method of pricing its product based on market characteristics
For a perfectly competitive firm, the pricing strategy is straightforward: charge the equilibrium market price and experience zero economic profit in the long run
For firms with market power, strategies become more complex
For a single-price producer, the optimal strategy is to increase production until marginal revenue is equal to marginal cost, which yields maximum profit
Some firms with market power, however, are able to charge different prices to different customers
Price discrimination refers to the practice of charging different prices to different customers for the same product
The ability to price-discriminate allows firms with market power to generate even more economic profit
Conditions for Price Discrimination
A firm engages in price discrimination by charging consumers different prices for the same good based on individual characteristics belonging to an indentifiable sub-group of consumers the quantity purchased, time, etc.
Two reasons why a firm earns a higher profit from price discrimination than uniform pricing:
1. Price-discriminating firms charge higher prices to customers who are willing to pay more than the uniform price.
2. Price-discriminating firms sell to some people who are not willing to pay as much
MARKET POWER AND PRICING STRATEGY
Introduction
We have examined how firms with market power can generate positive economic profit by influencing the price at which their products or services are sold.
This conclusion was based on the assumption that firms must charge the same price to all customers.
Now we explore alternative pricing strategies and show that when a firm with market power can “discriminate” among customers, additional surplus (beyond that achieved by a single-price monopolist) can be generated.
Firms with market power behave in different ways than those in perfect competition.
10.1 – The Basics of Pricing Strategy
A pricing strategy is a firm’s method of pricing its product based on market characteristics
For a perfectly competitive firm, the pricing strategy is straightforward: charge the equilibrium market price and experience zero economic profit in the long run
For firms with market power, strategies become more complex
For a single-price producer, the optimal strategy is to increase production until marginal revenue is equal to marginal cost, which yields maximum profit
Some firms with market power, however, are able to charge different prices to different customers
Price discrimination refers to the practice of charging different prices to different customers for the same product
The ability to price-discriminate allows firms with market power to generate even more economic profit
Conditions for Price Discrimination
A firm engages in price discrimination by charging consumers different prices for the same good based on individual characteristics belonging to an indentifiable sub-group of consumers the quantity purchased, time, etc.
Two reasons why a firm earns a higher profit from price discrimination than uniform pricing:
1. Price-discriminating firms charge higher prices to customers who are willing to pay more than the uniform price.
2. Price-discriminating firms sell to some people who are not willing to pay as much