Week 1 - MultiProduct Monopoly Flashcards
(13 cards)
Multi product monopolists
-Optimal pricing with multiple products
-Menu pricing
Dynamic monopolists
Optimal pricing for a durable goods monopolist
Vertical differentiation Vs Horizontal differentiation
- Vertical: Certain buyers may be willing to pay more for higher quality (Airline seats, cars, broadbrand internet)
- Horizontal: Buyers have different tastes for different products (Airline routes, soft drinks, TV shows)
When adding a new good π to your product line, how should ππ change?
When goods are substitutes (πππ > 0) then single good price is too low.
ο·When goods are complements (πππ < 0) then single good price is too high.
Two goods:
(ππβπΆπβ²)/ππ=1/|πππ|+ (πππππ(ππβπΆπβ²))/(ππππππj)
What is menu pricing?
Strategy where a monopolist offers a menu of products so that each type of consumer self-selects the option intended for them.
Utility function = π’π = π (ππ,π ) β π
π = Type dependent variable (High type value quality more than low type)
π : quality level of the product
In menu pricing, who receives an information rent?
High value types (e.g. those with higher π)βbecause they could pretend to be low types and pay less.
Why donβt prices rise during periods of peak
demand?
- Search costs. Consumers tend to search more during peak retail seasons (e.g.Christmas), therefore they are more price sensitive in those months.
- Collusion. Firms find it harder to collude on price when aggregate demand is high, since temptations to cheat are at their highest.
- Loss-leading. Firms sell popular items cheap to attract customers, then make money on everything else they buy. (main theory)
Chevalier et al (2003)
Price margins
- 7 Different products (seasonal variable goods)
- Found prices had dropped during expected peak times.
- Also compared advertising spending at these times
- Found that there was significant increase in spending during these times
- Price cuts are item-specific, even during non holiday demand spikes, therefore supports the loss-leading theory as they also looked at store traffic and it was low during these times.
Multiproduct monopolists and switching costs
Once a buyer purchases one item it is βcostlyβ for them to move to another seller (supports loss leading)
2 ways a monopolist can be socially optimal (no DWL)
- Regulated, forced to produce at MC and therefore at social optimal
- Perfect price discrimination - monopolist sell at exact maximum willingness to buy for every consumer in the market
What is Coaseβs conjecture and what does this mean for profits and prices for a two period durable good model compared to a one period durable good model (static)
As t β β, Durable good monopolists will price at Pc (MC) as buyers know prices will fall.
- Prices and profits will drop for these durable good monopolists as they are competing with their future selves, P1d<P1s.
How can durable good monopolists, mitigate the lost of profit in the two period model
- Firm should commit to maintain or even increase prices in period 2 as this causes the buyers in period 1 to have no reason to delay purchase.
- E.g LV has reputation where they never discount prices.
Ways to do this
- Limited time special offers (commitment to higher future prices)
- Limited edition product (Commitment to low capacity)
- Planned obsolescence (Iphones deteriorating in the future)
- Removal of ownership (Streaming, software as a service, renting out services)
How can firms commit to not lowering prices in the second period
Ways to do this
- Limited time special offers (commitment to higher future prices)
- Limited edition product (Commitment to low capacity)
- Planned obsolescence (Iphones deteriorating in the future)
- Removal of ownership (Streaming, software as a service, renting out services)
