Chapter 13- Price Discrimination and Menu Pricing Menu vs group pricing Group(and personalized) pricing Seller can infer consumers' willingness to pay from observable and verifiable characteristic (e.g., age) Menu pricing Willingness to pay private information e Seller must bring consumer to reveal this information How? Identify product dimension valued differently by consumers Design several versions of the product along that dimension Price versions to induce consumers' self-selection >Menu pricing(a.k.a. versioning, 2nd-degree price discrimination, nonlinear pricing) >Screening problem: uninformed party brings informed parties to reveal their private information e Wen Cao
© Wen Cao 6 Menu vs. group pricing • Group (and personalized) pricing • Seller can infer consumers’ willingness to pay from observable and verifiable characteristic (e.g., age) • Menu pricing • Willingness to pay = private information • Seller must bring consumer to reveal this information. • How? • Identify product dimension valued differently by consumers • Design several versions of the product along that dimension • Price versions to induce consumers’ self-selection Menu pricing (a.k.a. versioning, 2nd-degree price discrimination, nonlinear pricing) Screening problem: uninformed party brings informed parties to reveal their private information Chapter 13 – Price Discrimination and Menu Pricing
Chapter 13-Examples of menu pricing Case. Menu pricing in the information economy e Versioning based on quality Nagware: software distributed freely but displaying ads or screen encouraging users to buy full version >annoyance =discriminating device Versioning based on time Books: first in hardcover, later in paperback e Movies: first in theaters, next on DVD, finally on TV >price decreases as delay increases Versioning based on quantity Software site licenses Newspaper subscription → quantity discounts e Wen Cao
© Wen Cao 7 Case. Menu pricing in the information economy • Versioning based on quality •‘Nagware’: software distributed freely but displaying ads or screen encouraging users to buy full version annoyance = discriminating device • Versioning based on time • Books: first in hardcover, later in paperback • Movies: first in theaters, next on DVD, finally on TV. price decreases as delay increases • Versioning based on quantity • Software site licenses • Newspaper subscription quantity discounts Case. Menu pricing in the information economy • Versioning based on quality •‘Nagware’: software distributed freely but displaying ads or screen encouraging users to buy full version annoyance = discriminating device • Versioning based on time • Books: first in hardcover, later in paperback • Movies: first in theaters, next on DVD, finally on TV. price decreases as delay increases • Versioning based on quantity • Software site licenses • Newspaper subscription quantity discounts Chapter 13 - Examples of menu pricing
Chapter 13- Monopoly Menu Pricing Monopoly menu pricing Quantity-dependent prices(same product) e Suppose 2 types of consumers household, pH= 12-2qH business, Pb= 6-g B/2 Monopoly price decision for two markets MR(Q)=MC(Q,+ Q0)=MR(Qo=0 pH=6, gH=3 and pB=3, 9B=6 prot=3*6+63-0=36 Difficulty of implementing this pricing strategy price comparison, purchase in different market arbitrage, anti-trust law
© Wen Cao 8 Monopoly menu pricing • Quantity-dependent prices (same product) • Suppose 2 types of consumers • ‘household’, pH = 12-2qH • ‘business’, PB = 6-qB/2 • Monopoly price decision for two markets: MRH(QH) = MC(QH + QB) = MRB(QB) = 0 pH = 6, qH = 3 and pB = 3, qB = 6 profit=3*6+6*3-0=36 • Difficulty of implementing this pricing strategy: price comparison, purchase in different market, arbitrage, anti-trust law Chapter 13 – Monopoly Menu Pricing