APPLIED ECONOMICS FOR MANAGERS SESSION 8— I. BASIC DISCRIMINATION STRATEGIES A. PRICE TACTICS 1. TWO-PART TARIFFS 2. BLOCK-PRICING OR QUANTITY DISCOUNTS 3. MARKET SEGMENTATION B. PRODUCT DESIGN ISSUES 1. BUNDLING/TYING a. THE SHOW MUST GO ON b. MAGICAM 2. VERSIONING 3. LOCATION ISSUES C. PROFIT = CREATION AND CAPTURE OF VALUE II. TYING AND PRICE DISCRIMINATION A. IMAGINARY FIRM—ROWLING CORP. 1. MAKES A UNIQUE CAMERA CALLED THE MAGICAM. 2. PEOPLE IN PHOTO CAN WAVE AND TALK TO VIEWER. 3. HEAVY DESIGN COSTS SUNK IN DEVELOPING THE MAGICAM, BUT VARIABLE PRODUCTION COSTS = ZERO. 4. CAMERA REQUIRES SPECIAL FILM COSTING €2/PHOTO TO MAKE—SUPPLIED BY COMPETITIVE FILM INDUSTRY B. TWO TYPES OF MAGICAM CONSUMERS— 1. HIGH DEMAND P = 16 – Q (Q = SHOTS PER MONTH) 2. LOW DEMAND P = 12 – Q 3. THERE ARE 10 MILLION OF EACH TYPE C. STRATEGY 1: 1. SELL CAMERA FOR €50. 2. RESULT: BOTH TYPES BUY CAMERA, ROWLING EARNS €50 FROM EACH TYPE OR €100 MILLION PER PAIR D. STRATEGY 2: 1. DESIGN CAMERA SO THAT IT ONLY USES ROWLING’S SPECIAL MAGIFILM (WHICH COSTS €2 PER SHOT TO MAKE) 2. CHARGE €4 PER SHOT FOR FILM a. LOW DEMAND TAKE 8 SHOTS (€32 SURPLUS) b. HIGH DEMAND TAKE 12 SHOTS (€72 SURPLUS) 3. CHARGE €32 FOR CAMERA (LOW DEMAND SURPLUS) 4. RESULT: EARN €32 FROM BOTH IN CAMERA SALES PLUS €16 FROM LOW DEMAND AND €24 FROM HIGH DEMAND ON FILM EARN €104 PER PAIR E. STRATEGY 3: 1. INTEGRATE FILM AND CAMERA SELLS TWO TYPES a. 10 SHOT FOR €70 (LOW DEMAND VALUE OF 10 SHOTS) b. 14 SHOT FOR €86 RESULT (HIGH DEMAND VALUE OF 14 SHOTS LESS €40): 2. RESULT: EARN €50 FROM LOW DEMAND AND €58 FROM HIGH DEMAND--€108 PER PAIR F. NOTE QUANTITY DISCOUNT IN ALL STRATEGIES 1. PRICE PAID PER SHOT UNDER STRATEGY 2: a. LOW DEMAND: (€32 + €32)/8 = €8 b. HIGH DEMAND: (€32 + €48)/12 = €6.667 2. PRICE PAID PER SHOT UNDER STRATEGY 3: a. LOW DEMAND: €70/10 = €7 b. HIGH DEMAND: €86/14 = €6.14 III. COMPETITION WITH PRICE DISCRIMINATION & VERSIONING A. MONOPOLY POWER vs LARGE PROFIT B. INTENSITY OF PRICE COMPETITION WITH DISCRIMINATORY PRICES C. MONOPOLISTIC COMPETITION 1. CLOSE (NOT PERFECT) SUBSTITUTES ⇒ LOW PROFIT 2. INEFFICIENT—AVERAGE COST NOT MINIMIZED 3. LINEVILLE’S FIRE DEPARTMENT NICHE MARKETS AND MONOPOLISTIC COMPETITION $/UNIT AC MC D MR Q* QUANTITY