Intermediate Microeconomics Chapter 12: Pricing and Advertising Flashcards

5591414532	A price-discriminating firm earns a higher profit from price discrimination because:	- It charges a higher price to customers who are willing to pay more than the uniform price, capturing some or all of their consumer surplus. - It also sells to some people who are not willing to pay as much as the uniform price.	0
5591425495	Three conditions for who can price discriminate:	- A firm must have market power. - Consumers must differ in their sensitivity to price, and a firm must be able to identify how consumers differ in this sensitivity - A firm must be able to prevent or limit resales	1
5591430805	Perfect price discrimination (first-degree price discrimination)	A situation in which a firm sells each unit at the maximum amount any customer is willing to pay for it, so prices differ across customers and a given customer may pay more for some units than for others	2
5591435956	Quantity discrimination (second-degree price discrimination)	A situation in which a firm charges a different price for large quantities than for small quantities but all customers who buy a given quantity pay the same price.	3
5591439589	Multi-market price discrimination (third-degree price discrimination)	A situation in which a firm charges different groups of customers different prices but charges a given customer the same price for every unit of output sold.	4
5591446622	Reservation Price	The maximum amount a person would be willing to pay for a unit of output	5
5591451058	If a firm with market power knows exactly how much each customer is willing to pay for each unit of its good and it can prevent resale...	the firm charges each person his or her reservation price.	6
5591454108	A perfect price discrimination equilibrium is...	efficient and maximizes total welfare.	7
5591456287	Perfect price discrimination equilibrium differs from the competitive equilibrium in two ways:	- perfect price discrimination equilibrium, only the last unit is sold at that price - perfectly price-discriminating monopolies capture all the welfare	8
5591466727	Most customers are willing to pay more for the first unit than for...	successive units: (the typical customer's demand curve is downward sloping)	9
5591469135	Block-Pricing Schedules	Charge one price for the first few units (a block) and a different price for subsequent blocks. - First 20: $70 - Second 20: $50 - Third 20: (no profit at $30)	10
5591478719	The most common method of multi-market price discrimination is to...	divide potential customers into two or more groups and set a price for each group.	11
5591483206	The two approaches to divide customers into groups are:	- to divide buyers into groups based on observable characteristics of consumers (age, income, location, ect., ...) - or to identify and divide consumers on the basis of their actions	12
5591495071	Tie-In Sale	A type of pricing strategy in which customers can buy one product only if they agree to buy another product as well.	13
5591498505	Bundling (package tie-in sale)	- A type of tie-in sale in which two goods are combined so that customers cannot buy either good separately. - Bundling a pair of goods pays only if their demands are negatively correlated	14
5591506163	A monopoly advertises to...	raise its profits.	15
5591509511	A successful advertising campaign...	shifts the market demand curve by changing consumer's tastes or informing them about new products.	16
5591512958	If advertising shifts the demand curve outward,...	the firm's profit must rise.	17
5591515337	The firm undertakes this advertising campaign only if...	it expects its net profit (gross profit minus the cost of advertising) to increase.	18