The Economics of Organisations and Strategy. Chapter 11 Price Discrimination and Bundling.

The Economics of The Economics of Organisations and StrategyOrganisations and Strategy


Chapter 11

Price Discrimination and Bundling


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Chapter 11 - Question 1Chapter 11 - Question 1

Price discrimination is correctly defined as charging customers for the same product:

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B

C

A

D

Different point of sale prices;

Prices that are in different ratios to a common marginal cost;

A different price if they buy in bulk;

Higher prices the more they buy.


Chapter 11 - Question 2Chapter 11 - Question 2Which of the following is not a recognised form of price discrimination:

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B

C

A

D

Customers are separated into distinct groups and each group is charged a different price;

Output is sold in tranches at successively lower prices;

Customers are charged a flat entrance fee and a fixed price per unit consumed;

Each unit of output is sold at a different price.


Chapter 11 - Question 3Chapter 11 - Question 3Which of the following statements are true for first degree price discrimination?

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B

C

A

D

The demand curve becomes the firm’s marginal revenue curve;

Economic rent is maximised;

Consumers’ surplus is reduced to zero;

All of the above.


Chapter 11 - Question 4Chapter 11 - Question 4

Second degree price discrimination is also known as:

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B

C

A

D

Curvi-linear pricing;

Non-linear pricing;

Parallel pricing;

Consumer pricing.


Chapter 11 - Question 5Chapter 11 - Question 5Which of the following is not a necessary condition for third degree price discrimination to be effective in increasing a firm’s revenue:

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B

C

A

D

The firm must benefit from economies of scale;

Different groups of consumers value the product differently;

The firm must be able to prevent arbitrage;

Different groups of consumers have different search costs.


Chapter 11 - Question 6Chapter 11 - Question 6Another form of price discrimination is basing point pricing. This pricing system is based on an industry wide agreement that prices will be based on:

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B

C

A

D

A published list price for the industry, plus delivery transport costs;

Firm determined prices, plus delivery transport costs;

A basic price that includes all transport costs from factory to delivery;

Published list prices at specific locations, plus delivery transport costs.


Chapter 11 - Question 7Chapter 11 - Question 7A widely used form of price discrimination is bundling. This system is based on two or more products:

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B

C

A

D

Being viewed by consumers as complementary;

Being packaged in identical containers;

Being sold together;

Being offered at slightly different prices.


Chapter 11 - Question 8Chapter 11 - Question 8Which of the following is not a possible consequence of price discrimination, and therefore unlikely to be investigated by competition authorities:

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B

C

A

D

Charging excessively high prices to some consumers;

Increasing the overall supply and reducing unit costs;

Charging predatory prices in one market segment;

An intermediate supplier favouring some customers.


Chapter 11 – Answer 1 Chapter 11 – Answer 1

Correct answer: there is more than one reason why customers might be charged different prices and not be subject to price discrimination. For example, customers buying in bulk will reduce the supplying firm’s marginal cost and hence justify a lower price. It follows that a more robust definition refers to charging customers different prices when the marginal costs of supply are identical.

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Chapter 11 - Answer 2Chapter 11 - Answer 2

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Correct answer: Charging a flat entrance fee and then a uniform price to customers is not discrimination – all customers are treated the same. Buttons A, B and D represented third, second and first degree price discrimination respectively.



Correct answer: By charging each customer their reservation price, points on the demand curve show the increase in revenue when a new customer purchases the product. The effect of this is to transfer the whole of the area under the demand curve above marginal costs to the firm in the form of rent, an outcome that involves reducing consumers’ surplus to zero.

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Correct answer: Second degree price discrimination results in the price paid varying inversely with the quantity purchased; hence, the more a customer purchases in a given period, the lower the average price paid.



Correct answer: Third degree price discrimination involves selling the same product to different groups of consumers at prices that are in different ratios to a common marginal cost. If those buying in the lower priced market can sell to those in the higher priced market (ie, arbitrage) discrimination will not work. In order to pay a higher price, members of a group must either attach more value to the product, or their costs of search are high.

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Correct answer: The basing point form of price discrimination is based on industry wide cooperation, whereby industry rivals agree that delivered prices will be based on published list prices at specific locations, plus the cost of transport from these locations to the point of delivery.

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Correct answer: Where consumers have heterogeneous demands for two (or more) products, their valuations for the two products will vary. If the two products are offered as a bundle, then providing the bundled price does not exceed the sum of individuals’ reservation prices, the firm will sell more of both products, greatly increasing revenue.

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Correct answer: Price discrimination can raise a number of issues for the competition authorities. These arise if it is used to exploit market power or to create a barrier to entry. Price discrimination rarely involves an overall increase in supply, but if the result was lower unit costs and lower average prices the competition authorities would be pleased.

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The Economics of Organisations and Strategy. Chapter 11 Price Discrimination and Bundling.

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