Industrial Organization is the area of economics that studies the markets as institutions, the state of competition and strategic interaction among firms, the industrial policy and the business decisions firms make within the market framework. The course looks at the markets from three different perspectives: the economic theory, the applied business perspective and the institutional and legal perspective. The focus of the course is split equally between the economic theory and business perspective but there is a significant legal component incorporated in various topics. The course includes economic modeling, game theory, numerous real life examples and several case studies. We explore interesting topics of market organization such as negotiations, antitrust, networks, platforms, electronic markets, intellectual property, business strategies, predation, entry deterrence and many others. The basic objective of the course is to enable the student to understand the structure of markets and the nature of strategic competition. Knowledge in this course will be valuable for the students in acquiring managing and governance skills, enriching their understanding of the institutional framework of business, and improve their analytical ability in negotiations. Prerequisites: The course requires understanding of basic economic modeling, knowledge of intermediate microeconomics (especially production/cost theory), knowledge of basic concepts and methodologies of game theory, intermediate econometrics and basic calculus.
7. Intertemporal, peak-load, special editions
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Del curso dictado por National Research University Higher School of Economics
Industrial Organization: Strategy and Competition in Business
9 calificaciones
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National Research University Higher School of Economics
9 calificaciones
De la lección
Price discrimination
The topic for this lecture is pricing. In general in economics, we are used in a paradigm in which firms set only one price for each of their products. Sometimes this is indeed the case but, often, we observe that firms charge different prices to different consumers or different occasions or different purchased quantities. In reality, when a firm has some market power and the consumers are each not willing to pay the same for every unit, the firm can price-discriminate to increase its profits. We will analyze the three degrees of price discrimination, tying, bundling and several other methods of advanced pricing. We will also present a brilliant pricing case study with Polaroid.
Conoce a los instructores
Kosmas MarinakisAssistant Professor
ICEF and Faculty of Economics Sciences, HSE
In intertemporal price discrimination,
consumers are grouped according to their time preference in consuming the product.
Enthusiasts they have having
the inelastic demand they want the product as soon as possible.
You can see them in the news every time that their favorite product comes out.
They even put tents outside the stores and they spend
the night there so they will be the first one
entering and buy the product in the next day.
This can be a movie, this can be a book,
now they even do it with smartphones and,
and several other things.
Usual consumers on the other hand.
They are not in such a hurry,
say, "Okay, a new product came out."
They don't even hear it the time that it came out because they are
not enthusiasts and they can wait for the price to go down.
So, they see that the price is unreasonable for the moment they will say "Okay,
let's wait till the price becomes more reasonable and then,
it will be in my price range and I will bite."
When the product is newly released,
the product that you want to do enter temporal price commission of every product,
price will be usually high.
This is because only the enthusiasts are interested in this product at that moment.
So, once the market of enthusiasts has been exploited.
They all board, they are paid the amount of money that they're willing to pay.
Now, it's time for the price to go down so the product
will appeal to the general public to the usual consumers.
Examples is books.
When books come out in the beginning they come
out in a more expensive price as they become older
and older their price gradually decreases
because the interest of the readers also is decreasing.
With movies. It happens the same thing in one movies go to on the cinema,
then they're very expensive then at some point
several years later you can rent the DVD for
a very cheap price and in some countries
they even give them for free with newspapers after some point.
Gadget's is another example.
For example, when the new galaxy comes out
the older galaxies price will fall considerably,
so that people that they don't want to spend
that much money they will be also able to buy it.
The two markets are separated here with respect to time.
This is important and it's important because.
Time Traveling has not been invented yet at
least it's 2017 now we heard nothing in the news so far.
But you cannot travel through time and go from there one group to the other.
So, we have something like dynamic segregation.
If you are an enthusiast,
you have to go now.
You cannot say, "Yes, I'm an enthusiast
and I really want this product but I don't want to pay that
much so let me travel two years later from now that the product will be cheaper."
You cannot do that. You have to wait
and if you are an enthusiast, it's very difficult to wait.
Or we will get back to the intertemporal price discrimination later when we
will combine it with another method in
a very interesting combination of methods that we will see later.
Let's now talk about peak-load pricing.
You can do peak-load pricing for those products that
very demand is up even in different periods of time.
You have periods that demand is high and you have periods of demand is low.
Examples is air travel,
hotels, electricity usage, taxi.
How does this work? First of all,
the period is not always the same.
For electricity, we consume more electricity during the day than during the night.
Also, we are more interested in going to
beach hotels during the summer than during the winter,
so we see here we'll have a different period than the electricity market.
With taxis, we are interested to consuming and taxi service when it's a right after work,
or right before work,
or if it's rainy, or something like that.
So, we have these kind of demand which is uneven in time
according to some other things that are happening during the day or during the year.
Additionally. We might have capacity constraints that they may
also cause that the cost structure of the product is different,
in at peak periods.
Like for example, for electricity.
You have the same cost when you produce electricity
even if you produce electricity at night or a day.
You also have some capacity concerns you cannot
produce more electricity or less electricity,
you cannot store electricity in
the technology that we have till now in very big quantities.
So, what actually happens here is that
the marginal cost will also be fluctuating through the periods.
The firm might want to charge higher prices during the peak periods.
This is because of profitability reason.
Charge more when they need you more as simple as that,
because you can save resources.
If the price difference is enough then it will even out that demand as we saw before.
Back in my country in Greece,
we used to have this system of electricity charge
in which electricity was in charge in different tariffs during the day.
And we had this night electricity,
how they used to call it back then,
which started at 11:00 at night till 6:00 in the morning.
And I still remember my mom she was waiting until time will become 1:00,
so she will go and start the washing machine.
And this was because,
she thought that consumed a lot of
electricity and she wanted to go with a cheaper tariff.
But I remember, she wasn't sleeping,
she was waiting for the time to be exactly
11 so she will start that and this was not convenient for her.
So, if the pricing was the same,
she would do it during the day.
But because, the price was very different she would wait till
she start the machine and then she will go to bed and deal with clothing the next day.
So, you can save resources the way you can because you can make consumers
to jump from the one period to the other in this case.
It's also a method to increase the efficiency in the market.
And this is because since your marginal cost changes you
can charge different prices so you will be always closer to the marginal cost.
If prices closer the marginal cost,
we know from micro economics that these increases the efficiency in the market.
Another clever method of price discrimination is a special edition pricing.
The seller can take advantage of
enthusiasts by listening to different versions of the product.
You have seen this method for sure before,
now, you will understand the reasons why it happens.
There is a normally priced basic version that is simple and it's designed to appeal to
the general audience and then there is
a slightly better but usually much more expensive special edition of the product.
Examples is the limited edition of something so you
go buy something and it has a label and says limited edition.
Comedian, Jerry Seinfeld, used to say that,
"Limited editions are only limited to what
the producer can convince the buyers to pay their money for."
So, limited edition is a product made
in order to be charge more expensive and to appeal to enthusiasts.
Another example that I saw for real a few months ago,
I was in a store and I was interested in buying a PC laptop.
And I saw that they have the silver one and then the pink one,
pinkish like Rose Gold like they call it,
but it was actually pink and they have different price.
And, I saw the specifications of the machines and
because I was interested in the model, I tried to understand.
Okay, why is this more expensive?
Why is a pink one more expensive? What does it have more?
And I asked the seller,
the salesman there, and he told me,
"Oh, it's more expensive because it's pink."
And I ask, "So, what is the difference?
Is it more expensive to make a pink laptop or what?
What's the problem there?" And he said, "No, no, no.
Just people like, some people,
they like their laptops to be pink and they're willing to pay more," which is exactly
the reason in price discrimination in why these can happen.
If something got higher demand then it's easy to design a method
that will acquire more supplies from those people who are willing to pay more.
So, the enthusiasts will self select to buy the expensive version.
If you like something then you will pay more money for these because
your utility increases at
a more rapid way than the price has increased from the one version to the other.
Now, don't take this negatively,
we're all fools for something,
we all like something.
In my social media, I have
a Tabasco bottle picture and all my friends know that I love Tabasco,
so every time that they want to buy me a present they will go and buy something that is
relevant to Tabasco but what they don't know is that I like Tabasco to put in my food,
I don't like to wear it in the hat or to have it in a mug,
or to have it in a shirt,
or in all the other gadgets that they go and buy,
and they pay expensive enthusiast's prices for that.
So, we are all interested in buying
something that we will pay more money for this because we
like it and it's easy to separate an enthusiast from their money.
So, usual consumers on the other hand,
were all usual with respect to something.
We do not care an equal amount for every product out there.
There are some products that we like more.
So, we are enthusiastic in some other products that we like less,
so we are usual consumers for those products.
If you're a usual consumer for this product.
You do not really want to pay that much more and you will go for the cheaper version.
So, this is something that
sellers want to take into advantage because there's willingness to
pay and there is also ability to make
consumers to self select the group that they will go for.
The combination of the intertemporal price discrimination
and the special edition is extremely interesting.
Quite often, Special Edition is combined with an intertemporal price discrimination.
That is, you can have a special edition for something, a limited version,
and then or before you can have the basic version,
but not at the same time,
so they are different versions but also different timings when
you release them and we have two different approaches.
First is the approach of the publications industry.
The publication industry comes up with the special edition book first.
They give you the hardcover first,
the expensive version of the book will be available first,
and then after a few months, maybe a year,
they will release the basic cheaper,
version of the same book,
which is usually a paper box,
so the two versions can be easily distinguished.
It's the same text, same book,
but it seems like a different quality of the paper.
The approach of the entertainment industry is the opposite.
First, you release the cheaper version of the movie,
the basic DVD back than when we had DVDs.
Now, we buy our movies online,
so I'm not sure how they do it anymore,
but this was a very prominent method till just a few years ago.
So, they first release the cheaper basic version of the movie or
the video game or something that has to do
with another product has to do with the entertainment industry.
And after a few months or sometimes years,
they would release the expensive special versions,
the ones that have the extras,
the one that in some video games they also give you something like
a little doll with the superhero that's in the game,
and other things like that.
So, they have two different versions.
The reason why they do it,
not a lot of research has been done on that,
but our understanding in economics for now,
is that because consumers have much less uncertainty about a book than about a movie,
when a book comes from the same author there are not lots of factors there and probably,
the quality of the book or predictions if you are going to like it or not,
it's very safe because you know,
"I like how this author writes."
So, in this case, when the new book comes out you're
willing to pay from the beginning much higher.
But in movies, things are different
because there are movies that my favorite actor is very
good and there are other movies that I really
wished that my favorite actor would not be part of that movie.
So, first, you want to just see the cheap version of the movie if you like it,
you see it again, and again,
and again, and you say, "That's my favorite movie,
so I want to go and buy the DVD with the extras and the hard case and everything that
is something to collect this movie
because I personally love it and I want it to be in my collection."
We will continue with a different method which is also very interesting and very smart.
We'll talk about bundling right after this break.
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