Pricing Strategies
Uniform Pricing
 Non-Uniform Pricing
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Two-part tariff
Quantity discounts
Tie-in sales
Menu Pricing
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Quality Discrimination
Coupons
Southwest Airlines
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Conditions for Price Discrimination
Market Power
 Identify Consumers
 Prevent or limit resale
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Services
Warranties
Adulteration
Transaction Cost
Contractual Remedies
Vertical Integration
Government Intervention
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Canadian Web Pharmacy Sales

Lipitor is cheaper in the Mexico and Canada
than in US.

Does this create problems for Pfizer’s pricing strategy?
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http://www.canadamedicineshop.com
Does the US have any interest in protecting Pfizer’s
ability to do this?
Zocor patent expired in June 2006



What happened to Merck’s stock price?
What happened to Pfizer’s stock price?
What happens to Pfizer’s ability to use price
discrimination?
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Major industries using Aluminum
Industry
Elasticity of Demand
for Aluminum
Integrated by Alcoa?
Cookware
-1.6
Yes
Electric Cable
Elastic (copper a
substitute)
Yes
Automobile Parts
-1.5
Yes
Iron and Steel
Inelastic (no
substitutes)
No
Aircraft
Inelastic (no
substitutes at the
time)
No
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Perfect Price Discrimination
Inverse Demand: P=1 - .001Q
.64
MC = .28
360
720
1000
MR=1-.002Q
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Q
Two Part Tariff
Inverse Demand: P=1 - .001Q
.64
MC = .28
360
720
1000
MR=1-.002Q
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Tie-in Sales and Bundling
Expedia
Streets
Expedia Trip
Planner
Bundle
Consumer
$20
$15
$35
Professional
$30
$10
$40
Table entries are reservation prices
Strategy 1: Charge $20 for Streets and $10 for Planner
• Revenue = $60
Strategy 2: Charge $35 for the bundle.
• Revenue = $70
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Different Prices to Different Customers
Maximize   1   2   p1 (Q1 )  m Q1   p2 (Q2 )  m Q2
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Figure 9.2: 3rd Degree Price Discrimination
$
MC = m
Demand Group 1
Demand Group 2
Q2
Q1
MR for Group 2
MR for Group 1
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Other Methods of Third Degree Price
Discrimination

Cut price on complaints
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Value of Time
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L.A. Times
Rebates
Willingness to wait

Hard cover books
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.
Welfare Effects

Perfect price discrimination
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Efficient
Shifts surplus toward sellers
Third Degree Price Discrimination

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Price > MC
Inefficient allocation of goods between
customers
May make customers do inefficient things to
earn the lower price.
This slideshow was written by Ken Chapman, but is substantially based on concepts from
Modern Industrial Organization by Carlton and Perloff, 4th edition, McGraw-Hill.