. >> So now, we're going to talk about a

couple of the pricing strategies that companies that have some pricing power

can, can use. To demonstrate this and the benefits of

doing that, let's go back to once again, to our barbecue sandwich example that we

had introduced at the beginning, with a difference that now the price actually

changes every time the quantity changes. So, so the demand curve that the barbecue

sandwich store faces is downward sloping. And remember that when you sell, when the

price was 10, you sell nothing. But when you reduce the price to 8.8 you

sell 40 sandwiches. When you reduce it even more to 7.3 you

sell 90 sandwiches, and so forth. And you see that one of the problems that

we had and the reason the marginal revenue goes down, and that the marginal revenue

is less than the price, is because the owner of the barbecue sandwich store have

to sell the same price to everyone. So when he reduces the price, he's forced

to charge a lower price to people who were buying it at a higher price before.

But what if he doesn't have to do that? What if he could actually separate these

two type of consumers? What if he can charge the first 40

sandwiches the first 40 people at one person a sandwich, that's $8.80, and the

second 50 sandwiches at $7.30? Would that be better for him?

Well, let's make those calculations. So if he charges four sells 40 sandwiches

and he sells it at $8.80, he will make a revenue on that of $352.

Then he will charge the second 50 sandwiches for a lower price, so the

people who are not willing to pay as much for that, for.

So there's, you know, he could sell those extra 50s.

He lowers the price, because those people are not willing to pay as much for the

sandwiches. But what if he doesn't have to lower the

price on the first 40? So he only charged 7, $7.30 for the second

50 sandwiches, and he makes, of that, he makes $365.

So when he sells these 90 sandwiches here, the quantity is 90.

He was making, before, he was making $657 when he was charging the same price to

everyone, to the whole 90 customers. Well, now he's charging two different

prices. How much money he makes, well, he will

make 717. So you see that by charging higher to

people who are willing to pay more and less to people who are willing to pay

less, the restaurant owner ends up making more money.

Now, as we will learn at the end of the class, that's also good for people,

because more people could actually afford or buy the good.

But concentrating that on the bottom line for the company, this is clearly a winning

situation for the company, because actually they can make more money.

So if this is a winning situation for companies, charging different prices to

different consumers, then clearly they're going to have find ways of doing that.

And that's what we're going to talk about the first part of this, of this session.

That technique of charging a different price for the same good to different

consumers. That technique is called price

discrimination. You're charging the same you're, you're

charging different prices for the same good, for the same good to different

consumers. Now, clearly there's some requirements for

you to be able to do this. One is that you need to have some market

power. You know, if you work in a perfectly

competitive industry, like corn, you cannot change the price of your goods, so

there's no point of, you can't really do price discrimination.

So companies that have some degree of pricing power are the only ones who can do

price discrimination, but quite a few companies actually are in that position.

Second, clearly you have to prevent people buying it at a lower price from reselling

it to people for a higher price. You cannot, you have to prevent those 50

people buying at $7.30 to go back at, to go back and, and sell it to the people who

are buying it at $8.80. Right, so you have to prevent reselling,

which is the main thing. You have to be able to separate consumers

based on their willingness to pay, and that's actually the hardest part.

The first parts are pretty easy. Separating consumers is pretty hard.

Think about how hard it would be for, for, Mike, the owner of the barbecue store.

I mean how can, first of all, he needs to find out which consumers are willing to

pay what, and that's pretty hard, I mean how do you do that?

And second, he needs to able to charge more to those consumer who are willing to

pay more, and less to consumer who are willing to pay less.

But nonetheless there's many way you could, that companies not only can do this

directly, but they can estimate that in different ways.

Now, one way of doing it is by doing that by trying to find directly how much

different consumers are willing to pay. Well, I have two examples of when that it

is pretty, it's not exactly perfect, but it's pretty perfect.

So, think about car dealership. Right?

So a car dealership customer, customer a enters.

And the price, the sticker, I mean, everybody knows that you don't pay the

sticker price for the car, right? You have to somehow sit down with this car

dealership employee salesman, and try to negotiate with them, right?

And clearly, customer A that came at 10 had a price in his mind and he tried to

negotiate with the salesmen until he get that price.

And customer B that came out afterwards pay probably pay a different price.

And you sit down with the car dealers, with the salesman.

You tell him he tells you that this is how much the car is worth, $10,000.

And you say well that is a little too expensive.

I don't really want it for that much. I say well what if I give it to you for 95

and he said well that's still too much. And then you say well let me talk to my

manager and he comes out of there, the, the thing, and he goes back to the office

and I go back. Aw yeah I can give it to you for nine and

you continue to negotiate. Some of those negotiations could take

forever. I mean when I bought my second car, the

first, the first car I actually paid off, but the second car was a lot more repair

so I actually was in that dealership for about three hours negotiating with them.

That shows a little bit of how much I'm willing to pay for that car.

And what the negotiation does is to allow the dealership to really target and charge

me something very close to what I'm, how much I'm willing to pay.

Now the first time I bought a car, I didn't negotiate at all.

I basically, there, there was a sticker price and the dealer told me oh, I, I cut

it for $200, and I say well this is great, I'll buy it.

Now clearly my willingness to pay at that point, reflected the fact that I wasn't

willing to negotiate so much. So, the, the dealerships are able to

charge different prices, to different consumers, by negotiating with them, and,

and the result of that is that more people buy cars.

And the dealers also make more money because they, they if they can charge a

price of 9000 to someone who is only willing to pay 9000, they can sell a car

to them, they will do that instead of having to charge everyone 9500, and not

being able to, to sell it to the person who is willing to pay 9000.

Now clearly there's a bottom line here right, for the car dealership.

When they and this is when they go out to talk with a manager right?

The manager, if it's true that they actually talked to the manager, the

manager probably knows how much, how low can you go in this car.

And they probably not going to go lower than what it cost them.

So clearly, they, but they have a pretty big leeway on that, and they won't, they

won't charge anyone, or they won't lower than the cost, but they can go as low as

that. So in that situation, when the manager is

actually charging the customer something very close to their willingness to pay,

and charging different consumers different things, it's called perfect price

discrimination. And again, it's not, it might not be

completely perfect, discrimination, but it's pretty close.

All right? Now another example of perfect price

discrimination is financial aid and student college.

And if go, most colleges in the US, they, they have an endowment and they use this

endowment to help students fund their college tuition.

Now to decide how much financial aid they're going to give the student, they

usually require the parents of the student so it has its own income tax return,

returns. So they require financial information

about the customer in order to decide how much money they're going to, to give them

in financial aid. Essentially, what they're trying to do is

to find out how much each different student is willing to pay, and setting the

price close to how much they're willing to pay.

That's also perfect price discrimination. It works in the benefit of the university,

at least in theory, because they can make more money.

I show you the same way in which barbecue sandwiches are sold at different prices.

And also it works for the students because some students are able to go to school at

a price they can afford versus if they were charged only one price.

Some students would not be able to afford school.

But, those are two examples of perfect price discrimination.

The truth is that most companies will have to use some kind of estimate of the price

of the willingness to pay for the consumers in order to charge them

different prices. So, most of the examples you see out there

are examples of what we call imperfect price discrimination.

So letls look at that in the, in the next section.

. >> [music] Produced by OCE Atlas Digital

Media at the University of Illinois, Urbana-Champaign.

4.1. Perfect Price Discrimination

Princípios de Microeconomia

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