A Price Discrimination and a Single-Pricing Strategy - Essay Example

? MANAGEMENT MANAGEMENT You own a local sub shop in a college town. You primarily serve two groups of people: local residents (both and other local residents) and visitors to your town. Devise a price discrimination strategy that will increase your revenues compared to a single-pricing strategy.  A strategy in which different prices charged to different customers for the same product or service is called price discrimination strategy. As a seller, I know that the visitors are ready to pay more since they may not have much idea about the exact prices of the products in my town. Same product may have different prices in different towns and therefore even if I charge higher prices, the visitors may not bother much. Moreover, most of the visitors may not bargain much since they could be in a holiday mood or a pleasant mood. On the other hand, students and local residents may have completely different purchasing habits than the visitors. They are aware of the local market very well and therefore I cannot charge them higher prices. Moreover, If I charge different prices to the college students and residents, Suppose, I wanted to sell a mobile phone which is selling at a price of $ 200 to the locals. I can think of selling the same mobile phone at a price of $ 225 to $ 250 to the visitors, based on the variations in their demand. Before asking higher prices from the visitors, I should make sure that their demand for that particular product is on the higher side. Suppose the cable TV industry is currently unregulated. However, due to complaints from consumers that the price of cable TV is too high, the legislature is considering placing a price ceiling on cable TV below the current equilibrium price. If the government does make this price ceiling law, diagram and explain the effects with supply and demand analysis. If the cable TV company is worried about disgruntling customers, suppose that the company may introduce a different type of programming that is cheaper for the company to provide yet is equally appealing to customers. Explain what would be the effects of this action.  From the diagram given below, it is clear that when the price goes from the equilibrium price, demand will become lesser than the supply. At the same time, if the government places a price below the equilibrium price, the demand may become more than the supply. (Tutor2u, n. d) Instead of charging a uniform price to everyone, the cable TV company can think in terms of charging the customers with respect to the number of paid channels they would like to watch. For some customers may not like sports channels and some others may not like movie channels. The cable TV company can think in terms of allowing the customers to select the channels they would like to watch and based on that the company can decide the prices of the service. Thus customers will get much more flexibility in selecting channels and controlling their budget for watching television channels. At the same time, it should be noted that the cable TV company may not loss any revenue since more customers will come forward to purchases such services because of the increased flexibility in selecting channels. Consider a perfectly competitive market. Analyze and explain in detail using graphical tools to show what you expect to happen to the number of firms and firm profitability in the short run and long run a) if demand for the product falls and b) if demand for the product rises.  (Demand in a Perfectly Competitive Market, 2011) In a perfectly competitive market, sellers may not get the freedom to fix the price. If they set a price above the market price, nobody will buy their product in a competitive market. In short, they will get only a normal profit in the long run. Some firms may fix higher prices to their products if the competition is less. Such firms will get abnormal profits in the short run. The abnormal profit earned by a single firm in a market will encourage others forms to enter the market and therefore supply will increases and the price would come down. Discuss why some long-run average cost curves are steeper on the downward side than others. Discuss fully.  Long run average cost curves represents the economies of scale and diseconomies of scale as far as a firm is concerned. Economies of scale means the ability of a firm to reduce the unit price of a product with the help of bulk production. Diseconomies of scale is the ability of the firm in producing goods at increased unit cost. It should be noted that when a firm go for bulk production, the unit prices would come down since the overhead expenses will be distributed over more products. On the other hand, when a firm produces less, all the overhead expenses will come over less number of products and therefore the unit price would go high. When a firm becomes larger, it would tries to achieve the maximum amount of economies of scale and reduce diseconomies of scale as much as possible and that is why the curve starts to slope towards the positive direction. If the average cost curve is steeper, it means that the firm is more inelastic in its functioning with respect to cost and quantity. If you purchased a new model of a digital camera right after it is released, you will likely pay more than if you purchase it six months after release. Explain why this is an example of price discrimination on the part of the firm.  Most of the firms have a habit of putting a higher price to a newly introduced product in order to exploit the publicity obtained for that product before the introduction. For example, iPhone 5 is under construction at present and many hypes were associated with this product. Convinced by such publicities, many people are waiting for the release of this product and are ready to pay any amount for it. The company knows about such consumer psychology and will put a much higher price during the initial months after its introduction. However, such hypes will be settled in the long run and the demand may come down. Under such circumstances, the company may reduce the price in order to create more demand to that product. In other words, a type of price discrimination is implemented by many companies when they introduce new products in the market. Explain the rationale and the implications of the new guidelines used by the Department of Justice and the Federal Trade Commission for evaluating proposed mergers.  “On 19 th August, 2010, The Federal Trade Commission and Department of Justice issued revised Horizontal Merger Guidelines. The major rationale behind the new guidelines is to decide whether a merger of competitors may harm competition” (Federal Trade Commission and U.S. Department of Justice Issue Revised Horizontal Merger Guidelines, 2010). Competition is necessary in a market in order to reduce the exploitation of the consumers by some monopolistic firms. It should be noted that Microsoft is currently exploiting the market because of their monopoly. Merger helps a company to reduce competition. Reduced competition will help the company to increase the prices of their products and services. Moreover monopoly prevents the scope for research and development and therefore innovative products may not come out. It should be noted that if a strong competitor was in the market, Microsoft would have reduced the prices of their products and also increase the budget for research and development. New guidelines aimed to prevent unethical merger activities to exploit the market which is definitely a good sign as far as consumers are concerned. References Demand in a Perfectly Competitive Market (2011), Retrieved from http://www.cliffsnotes.com/study_guide/Demand-in-a-Perfectly-Competitive-Market.topicArticleId-9789,articleId-9763.html Federal Trade Commission and U.S. Department of Justice Issue Revised Horizontal Merger Guidelines (2010), Retrieved from http://www.ftc.gov/opa/2010/08/hmg.shtm Tutor2u, (n. d). gcse economics - demand and supply - price equilibrium. Retrieved from http://tutor2u.net/economics/gcse/revision_notes/demand_supply_price_equilibrium.htm Read More