SUMMARY: Industrial organization. Markets and strategies., Sintesi del corso di Economia Industriale

Scarica SUMMARY: Industrial organization. Markets and strategies. e più Sintesi del corso in PDF di Economia Industriale solo su Docsity! SUMMARY CHAPTER 5 •​ ​Market externalities imply market failure​. Pigou taxes and other mechanisms may reestablish equilibrium efficiency. • The ​monopoly model​ provides a good approximation to the behavior of dominant firms. • The ​degree of monopoly power​ is​ inversely related to the demand elasticity faced by the seller​. • The main ​areas of competition policy​ are price fixing, merger policy, and abuse of dominant position. • A high-power regulation mechanism provides strong incentives for cost reduction but little incentives for quality provision. In addition, it implies a high degree of risk for the regulated firm and requires strong commitment on the part of the regulator. Chapter 6 PRICE DISCRIMINATION In a ​perfectly competitive market​, the law of ​ONE PRICE​ must prevail;​ that is, there cannot be two different prices for the same product. If there were two different prices, then ​arbitrage ​would take place. (Arbitrage refers to the practice of buying and selling in order to profit from a price difference; an arbitrageur is an agent who engages in such practice.) By contrast, ​in the real world it is very common to observe more than one price set for what is apparently the same product​, while little or no arbitrage occurs. This is because most real-world markets are not perfectly competitive. So ​in order to have more than one price to prevail in equilibrium, there must be some market friction. MARKET FRICTION → anything that interferes with trade. Examples of such market frictions include: - ​Physical impossibility of resale​. This is the reason why price discrimination is more frequent in services than in physical products: have you ever seen anyone reselling a haircut? - ​Transactions costs​. If RiteAid offers three tubes of toothpaste for the price of two, you could potentially buy a multiple of three and then sell them individually at the single tube price; but this would imply such a hassle that it's probably not worth the effort. - ​Imperfect information​. Consumers may simply not know about the different prices. More on this in Chapter 14. - ​Legal restrictions​. For example, in most countries it is illegal to resell electricity, so sellers can price discriminate without fear of resale. More on this in Section 6.5. Price sometimes changes with the number of units and sometimes with the consumer. The practice of ​setting different prices for the same good​ is known as ​PRICE DISCRIMINATION (whereby the relevant price in each case depends on the quantity purchased, on the buyer's characteristics, or on various sale clauses​.) The ​goal of price discrimination​ is selling for a higher price to consumers whose willingness to pay is higher; and selling for a lower price to consumers whose willingness to pay is lower. Price discrimination allows the seller to create additional consumer surplus​ and to capture existing consumer surplus. Its success requires that resale be expensive or impossible. This picture shows how a monopolist sets its price. For a given (linear) downward sloping demand curve, and constant upward sloping marginal cost, the figure depicts the optimal price for a monopolist selling one product. We can calculate the ​Marginal Revenue​ curve which tells us that the total revenue increases when increasing quantity and at the same time giving up some money. ​???? frase giusta ma scritta male QUANTITY THAT MAXIMIZES PROFIT​ is given by the one such that MC=MR. The ​OPTIMAL OUTPUT level ​is ​given by the intersection of marginal revenue with marginalqM cost​, and the ​OPTIMAL PRICE is ​given by the demand curve and the optimal output level ​.pM qM At this price and output level, the ​seller makes a profit given by ( - c) ​(ignoring fixed costs).pM qM Optimal pricing is a balancing act: by setting a higher price, the seller would receive a greater margin, p - c, per unit sold; but by setting a higher price, the seller would also sell fewer units. The values , ​strike the right balance- the one that ​maximizes profit​.pM qM → ​LINEAR PRICE WHICH MAXIMIZES PROFITpM FIGURE 6.1 Lost revenue under simple pricing - Losses deriving from linear pricing policies AREA A tells us the PROFITS LOST in case of linear price by the seller because some consumers are willing to pay more than pM : a monopolist is selling a number of units at a price much lower than the price that consumers would be willing to pay. In some markets we observe ​personalized prices​ → each customer is charged a different price: exactly his willingness to pay. Examples of these markets are ​Customer markets​ → markets where sales terms are tailored to each individual customer. Eg.: large commercial aircraft, enterprise software, landing fees at airport, plumber, lawyer, piano teacher. The FINAL PRICE depends on: - the customer’s willingness to pay - the bargaining power of the two parties (but ignore this for the moment). The situation when the seller has perfect information about each buyer's valuation and is able to set a different price to be paid by each buyer is known as ​perfect price discrimination​. 1. DISCRIMINATION BY INDICATORS SELECTION BY INDICATORS​ corresponds to the situation when​ the seller divides buyers into groups, setting a different price for each group ​(each individual can be uniquely assigned to a group) This practice is also known as market segmentation ​eg. by Geographical location, students. CONTEXT​: ​Different market segments can be identified directly. We don’t know exactly the willingness to pay of each consumer but we know the willingness to pay of a sufficiently large group of consumers Trick: apply elasticity rule to each market segment RULE: different elasticities → so apply different prices ELASTICITY RULE: higher prices in less elastic markets (the larger the mark up, the lower is elasticity of demand) THE HIGHER IS THE ELASTICITY OF DEMAND, THE LOWER IS THE MARK UP: Under discrimination by market segmentation​, a seller should charge a lower price in those market segments with greater price elasticity. EXAMPLE: Imagine the left graph is the Market demand, which is the result of the demand of 2 groups of people: H, high and L, low which is the willingness to pay. (p) D (p) DH + L High price Low price Low elasticity More elasticity is exactly in the middle of​ ​and p * p*H p*L WELFARE EFFECT (from price discrimination): People with low elasticity (higher willingness to pay) would pay more ⇒ loose People with high elasticity (lower willingness to pay) would pay less ⇒ gain FIRM maximizes profit (profit is either same or more than profit with linear pricing, never less) USES THIS GRAPH TO EXPLAIN WHAT HAPPENS IN EXERCISES FOR EXAM EXAMPLE Left side​: no price discrimination (nobody of group L was buying) overall MARKET DEMAND MR=MC ⇒ price is p* Right side: ​if the firm is able to price discriminate ONLY H is buying H group is indifferent because he pays the same price L group prefers PRICE DISCRIMINATION that NO price discrimination 2. SELF SELECTION Price discrimination by self-selection​ ​is the situation when ​the firm knows the existence of different types of consumers in the markets​ ​but does not (cannot) directly identify different market segments​ and thus the consumer as belonging to a particular group → ​BUT can still induce customers to distinguish themselves. So the ​STRATEGY ​the firm will have to follow is that: ​SELF-SELECTION​ → ​The seller indirectly sorts consumers by group by offering different "menus" or "packages” and the consumers self-select and choose the option that suits them the most. These can be combinations of fixed and variable fees, different combinations of price and quality, different combinations of price and quantity, and so forth. Consumers in turn self-select according to the group they belong to. eg. discount airfares If you charge different prices for the same product, expect arbitrage - unless you make the product slightly different. How to induce consumers to self-select? Using VERSIONING VERSIONING → design and offer different product lines that appeal to different consumers. A scheme to induce customers to select themselves into high and low prices. Thus price discrimination by versioning leads to a higher revenue for the seller One extreme form of versioning occurs when firms reduce the quality of some of their existing products in order to price discriminate, that is, firms produce​ damaged goods. EXAMPLE : ​Two types of consumers: tourist and business travellers. The firm does not know who is the tourist and who is the traveller, and even if it does know it cannot condition the purchase of a given ticket to the nature of the consumer. (NR=Non Restricted) Both groups buy the tickets ⇒ sell 20 units ⇒ Revenue = 350 x 20 = 7.000 Tourist group will not fly ⇒ sell 10 units ⇒ Revenue = 800 x 10 = 8.000 (NR) = 800 - 800 = 0UB (R) = 400 - 300 = 100UB → BETTER!!! Strategy 3 ​WON’T WORK​:​ ​Putting this combination in the market both business and tourist travellers will buy the RESTRICTED TICKETS and the firm will lose the opportunity to extract the surplus of 800 from the business travellers. → ​NOT FEASIBLE INTERTEMPORAL PRICE DISCRIMINATION Non-durable goods, like groceries or bus rides, are defined by a demand flow: in each period, consumers need to purchase a certain amount. By contrast, pricing durable products involves one additional dimension of price discrimination: time. By setting different prices now and in the future, a monopolist may be able to engage in price skimming: to sell both to high-valuation buyers at a high price and to low-valuation buyers at a low price. 6.3 NON-LINEAR PRICING Definition​: ​unit price varies with quantity purchased​ (eg. 2$ for 1, 3$ for 2) Linear pricing may "leave money on the table;" and ​non-linear pricing​ is a strategy for capturing some of that back. Typical examples ● two-part tariff → fixed entry fee (​F​) + per-unit price (​p​) ​(eg. utility bills: electricity, water..) ● quantity discounts (eg. buy 3, pay 2) What is the optimal structure? What are the main obstacles to implementation? TWO-PART TARIFFS SUPPOSE ​each consumer demands several units​ (minutes of calls, hour at the gym, etc) Let​ D(p) ​be each consumer’s demand curve. How can we set F and p to maximize profit? And this means: How can a two-part tariff extract more surplus from these consumers? LEFT: Linear price RIGHT: non linear price studies the optimal quantity in the case of linear price q* studies the optimal price in the case of linear price p* ↓ Here our monopolist makes a ​profit ​equal to the BLU AREA Looks like PERFECT PRICE CS ​is given by the RED AREA ​DISCRIMINATION ORANGE AREA → Dead weight loss Here the monopolist having F and p as instruments, will set: - ​Price per unit to maximise the consumer’s surplus ⇒ p = MC ⇒ ​when monopolist has p=MC → CS = AREA blu - Fixed fee​ ​set to extract consumer’s surplus ⇒ F = CS (p=MC) COMMENTS: The inefficiency of the monopoly (also due to the area of DWL), if our monopoly is ​able to perfectly price discriminate​, is eliminated because our monopoly will want to sell all the units of quantity ​q ​(orange)​ ​. Here is exactly the same story, instead of having all those information regarding the willingness to pay for each individual unit by each consumer, we have a simple knowledge of the demand function of our individual, which allows our monopolist to charge a much ​simpler structure: a fixed fee + a linear price and obtain EXACTLY THE SAME OUTCOME IN TERMS OF EFFICIENCY​ → the monopoly creates an outcome by​ q0 which is as good as in the perfectly competitive market. The difference with the perfectly competitive market is: REDISTRIBUTION, with PPD ​all ​the consumer surplus was appropriated by the monopolist. PRACTICE: gym - ​Individual demand function in terms of hours per month: ​ q = 1 − p - ​Marginal cost of having one additional visit for the gym​ ​is ​=0 - ​Optimal price per hour First create an inverse demand function​ →​ p = 1 − q Then create MR function and will be equal to​ .5q1 − 0 (0.5q because MR has twice the slope of the Demand curve, and hits the x axis exactly in the middle) and as MC=0 ⇒ p =​ ​(from q =​ )2 1 2 1 - ​Profit per customer​ (per linear price):​ = x ​ =​ L evenue cost = R − p x q) ( − 0 = 2 1 2 1 4 1 - ​Optimal two-part tariff:​ ​you can charge a price per hour and a fixed fee Price per hour must be set to maximize the Consumer surplus, and the fixed fee to extract this CS. Given that MC=0 → Which is the price that maximizes consumer surplus? ​p = MC → p = 0 Fixed fee​ = Consumer Surplus at a price equal to zero = AREA of the triangle ⇒ Fixed fee: equal to the AREA of the triangle under the demand curve (Both base and height are equal to 1 because of the demand function )q = 1 − p ⇒ FIXED FEE = =2 (1x1) 2 1 Profit per customer (per non linear price) :​ ​=​ NL 2 1 HUGE INCREASE in profit TWO PART TARIFF IS MUCH BETTER BUT DOES IT ALWAYS WORK? With one individual everything is simple A monopolist's optimal ​TWO-PART TARIFFS​ consists of a positive fixed fee and a variable fee that is lower than monopoly price. Total surplus is therefore greater than under uniform pricing. MULTIPLE CONSUMER TYPES AND MULTIPLE TWO·PART TARIFFS. Given that there are different types of consumers, it is natural to assume that the seller sets different two-part tariffs. If you can condition the price on some observable characteristics, having many different consumers doesn’t matter, because you simply calculate the OPTIMAL PRICE, the optimal pricing policy for each consumer, and then you apply this optimal pricing policy. ⇒ Because of ASYMMETRIC INFORMATION​ (the inability of the firm to observe the private information of the consumer’s type), t​he offers that fully extract the consumers’ surplus are NOT available to the firm​. If the firm offers in the market the same two combinations as in FI​ : ● consumers of type H ​→​ , , TH = pH FH = c′ (c ) CSH ′ ● consumers of type L​ →​ , , T L = pL F L = c′ (c ) CSL ′ The CS is equal to the BLUE AREA buying Tariff L. The FIXED FEE is made such that it fully extracts your CS, you are left with CS=0 for both (H buying and L buying ) TH T L BUT ​buying at​ (​instead of having​ CS=0​)​ has a POSITIVE CS.TH T L ⇒ ​Both types of consumers will prefer to buy at the offer aimed at consumer L : would NOT work. The gain each H-type consumer make by “cheatin” is the YELLOW AREA. This is also a measure of the firm’s lost profits for each “cheating” consumer. WHAT IS THEN THE NATURE OF THE OFFERS THAT THE FIRM CAN OFFER IN ORDER TO MAXIMIZE ITS PROFITS? If the seller wants consumers to be sorted across different menus, then it must make sure that type H consumers have no incentive to adopt type L menu. The seller must make an offer such that 2 things happen: - EVERYONE BUYS and - L buys at TL & H buys at TH ⇒ ​The seller to maximize profit must make an offer that satisfies these two constraints: - ​INCENTIVE COMPATIBILITY CONSTRAINT (IC): ​Each consumer must prefer to buy at the offer aimed at his/her own type​ ​(type H prefers plan H to plan L), so that ≥ UL , ) (pL F L UL , ) (pH FH ≥ UH , ) (pH FH UH , ) (pL F L - ​PARTICIPATION CONSTRAINT (INDIVIDUAL RATIONALITY) (IR): ​each consumer must be willing to buy, each consumer prefers some plan vis-a-vis no plan at all, so that ≥ UL , ) (pL F L 0 ≥ UH , ) (pH FH 0 For example, when versioning, the seller must make sure that the high-valuation buyer does not prefer the stripped-down version (​incentive constraint​); and that the low-valuation buyer prefers buying to not buying (​participation constraint​). Under AI, if we use the FI offer we lose the YELLOW AREA. So we must make an offer that satisfies the IR and the IC. An example of offers which satisfy the two constraints could be making the same offer: ❏ consumers of type L →​ : and T L pL = c F L = CSL ❏ consumers of type H → : and TH pH = c FH = CSL BUT ​I keep losing the YELLOW AREA, the amount of lost profits is identical to the previous case. The loss of profits comes from the gain that H-type consumers make pretending to be L-type. The possible way to reduce this gain is by making the offer aimed at L-type ​LESS ATTRACTIVE​ to H-type consumers. In order to do so, ​the seller must​ ​RAISE the PRICE L-type consumers pay. Let’s imagine that instead of charging to the low type a price equal to the MC (​C’​ of right picture), I charge a price larger that MC : equal to ​p°. If I want them to buy at this higher price, and so at a lower CS, I must ask them a lower fixed fee. ● L-type buy less their quantity ● L-type gets a lower CS and pay a lower fixed fee (GREEN AREA) We LOSE some part of profit from L-type : GREEN AREA ● H-type when cheating pretending to be a low type: gain less (SMALLER YELLOW AREA than before) and pay a larger fixed fee (LIGHT PINK as before but ​+ ​DARKER PINK AREA) → prefers to remain H-type We GAIN from H-type : DARKER PINK AREA We have to compare what we lose from L-type consumers and what we gain from H-type consumers. If there are a 1000 of H-type consumers and only 1 L-type consumer, we are very happy because we gain a lot from H-type, and lose very little from L-type. THERE ARE A LOT OF OTHER EXAMPLES THAT INDUCE ​SELF SELECTION ! GENERAL LESSON: need an additional (non-price) dimension to screen customers Many applications of inducing SELF-SELECTION: - DAMAGED GOODS → ​low value version has equal or even higher production cost than high value version → clearly motivated by market segmentation - INTERTEMPORAL DISCRIMINATION eg. a new version of iphone comes out, the price is very high, and then becomes lower → a type of damaged goods (why?) SLIDE, non so cosa intende → The problem is that in a sense if nobody is impatient in having the good nobody will buy. ​ the durable goods monopoly curse ❖ Does e-commerce make price discrimination easier or more difficut? EASIER ​because of more info on consumers → know better the demand function on different groups → there is NO more the problem of asymmetric information DIFFICULT ​because → price discrimination becomes more visible → we used a setup where the firm is a monopolist BUT with oligopolistic firms there is ​competition ​where the firms cannot extract surplus from consumers → Reselling (price discrimination works nicely if there is NO reselling) AUCTIONS ​(asta) So far we have seen FIXED-PRICE​, ​even if it is not fixed but means that the firm sets a price and then the price is sold in the market. But there are other ways to interact in a market, and we will look at the opposite one: AUCTIONS. In a sense, an auction is the best form of price discrimination by self-selection. I know the distribution of buyers' valuations but not the precise value of each buyer's valuation; I thus want to create a mechanism whereby buyers' actions lead them to pay a price that is related to their valuation. Differences between types: - PRICING → Firm sets the price - AUCTIONS → Buyer sets the price - NEGOTIATIONS → Both decide the price PROS and CONS OF AUCTIONS VIS-A-VIS PRICING (and NEGOTIATIONS) FIXED PRICE VS AUCTIONS EXAMPLE: ​ Imagine that a Seller owns a widget, and he has no value for it - There are Two interested buyers; these buyers have an identical valuation which could be either $100 or $150 (equal probability of ½ ) - BUT the seller doesn’t know exactly which of the two is the valuation, (Buyers know their valuation, seller does not) the only thing that he knows is → Perfect correlation: ​buyers have same valuation ​= 100 ​, ​= 100B1 B2 OR ​= 150 ​, ​= 150 , BOTH events have probability = ½B1 B2 - ​Imagine the seller sell the good at a FIXED PRICE: Probability = ½ , which is the EXPECTED PROFIT? IF ​price ​p=150​, ​then the expected profit will be calculated in the event they have a low valuation, so in case of selling ZERO and high valuation so in case of selling just to 1 of them : E(𝝿) = ( ½ 🇽 0 ) + ( ½ 🇽 150 ) = 75 IF ​price ​p=100, ​then the​ ​expected profit will be: in the event they have a low valuation of the good, they are having 100 and in the event of a high valuation they are having 100 : E(𝝿) = ( ½ 🇽 100 ) + ( ½ 🇽 100 ) = 100 Summarizing - ​Imagine the seller runs an Auction, specifically an​ ​ASCENDING PRICE AUCTION: → if the two have a valuation of 100, and they arrive at that value they will stop. So in the low value event they will get 100 and in the high value event they will get 150. So ​E(𝝿) = ( ½ 🇽 100 ) + ( ½ 🇽 150 ) = 125 ⇒ ​HIGHER PROFIT WITH an AUCTION than SELLING WITH A FIXED PRICE By running an auction you managed to extract the information about the buyers valuation ⇒​ auction as ultimate strategy for price discrimination by self-selection AUCTIONS FORMATS (BID = offerta) (TIE=parità) Auctions come in many different shapes and sizes - ​ASCENDING AUCTION​ (a.k.a. English): The good is sold to the last bidder for the highest bid. Common to sell art and antiques. - ​FIRST-PRICE DESCENDING​ (a.k.a. Dutch): The seller ​reduces ​the price until someone accepts the offered price and buys at that price. - ​FIRST-PRICE SEALED-BID AUCTION​: Bidders submit a bid simultaneously without seeing anyone else’s bid and the highest bidders wins. The winner pays its own, highest bid. - ​SECOND-PRICE SEALED-BID AUCTION​ (a.k.a. Vickrey): Bidders submit a bid simultaneously without seeing anyone else’s bid and the highest bidder wins. The winner pays the amount bid by the second-highest bidder. ELEMENTS OF AUCTIONS - ​VALUE →​ ​Private value auction​ : individual bidders know how much the good is worth to them but not how much other bidders value it. → ​Common value auction​ : the good has the same value to everyone, but no bidders knows exactly what the value is. - ​NUMBER OF UNITS → Auctions can be used to sell one or many units of a good: uniform price or discriminatory EXAMPLES: Art, wine; eBay; Government procurement; Flowers, fish; T-bills, IPOs. BIDDER STRATEGY We now want to understand how bidders bid in these different types of auctions. ​is the value they give to the object, and​ ​is the bid they make.vi bi A bidding strategy amounts to a Trade-off similar to monopoly pricing Reducing price, increases quantity BUT reduces the margin on each of the unit. With auctions is exactly the same thing : THE LOWER IS YOUR BID, THE HIGHER IS YOUR SURPLUS, BUT THE LOWER IS THE PROBABILITY OF WINNING. ​ (trade off between CS and probability) - Seller: margin VS quantity sold - Bidder: margin VS winning probability The elasticity rule (or the MR = MC rule) indicates the optimal balance between these two considerations. → Optimal bid results from ​MR = MC -type of rule NEGOTIATIONS So far we've considered two possible extremes in the process of price formation: posted prices, where the seller sets the price; and auctions, where buyers, through their bidding behavior, effectively set prices. What about the case when both seller and buyer set prices? Suppose the seller sets a price at which it is willing to sell. The buyer chooses not to purchase but instead makes a counter-offer. At that point, the seller may accept the counter-offer or, if it rejects the counter-offer, make the buyer a new offer; and so on. This is an example where price is determined by a ​bilateral negotiation process​ between seller and buyer. One combination that is particularly frequent is auctions followed by negotiations and fixed prices: I mentioned earlier that the extreme case of perfect price discrimination provides a useful framework for the welfare analysis of price discrimination. Figure 6.2, which illustrates the effects of a two-part tariff, also depicts the difference between simple pricing and perfect price discrimination. A monopolist that cannot price discriminate sets price​ , thus selling output .​ Under this solution, pM qM profits are given by A and consumer's surplus by B; total surplus is thus A + B. Consider now the case when the seller can discriminate between different buyers. The price charged to each buyer is given by the latter's willingness to pay. The monopolist will thus sell to all buyers whose willingness to pay exceeds marginal cost, that is, to all buyers from 0 to .​ The monopolist's profit is now qD given by A + B + C, whereas consumer's surplus is zero; total surplus is therefore A+ B+ C. There are several relevant points in the comparison between the solutions with and without price discrimination: (a)​ Total welfare is greater under price discrimination (A + B + C as opposed to A + B). (b)​ Consumer welfare is lower under price discrimination (zero as opposed to B). (c) ​Different consumers pay different prices under price discrimination. (d) ​More consumers are served under price discrimination (specifically, all consumers between qM and qv are served under price discrimination but not under uniform price). Although this is a very simple, extreme example, it serves to illustrate the main tradeoffs implied by price discrimination. First, the trade-off between efficiency (point (a), which favors price discrimination) and consumer welfare (point (b), which favors uniform pricing). Second, the trade-off between "fairness" (point (c), which favors uniform pricing) and the objective of making the good accessible to as many consumers as possible (point (d), which favors price discrimination). If distribution concerns are not very important, then a case can be made in favor of price discrimination, for it increases total efficiency. However, if distribution between firms and consumers, as well as across consumers, is an important issue, then a case can be made for disallowing price discrimination. This analysis is a bit simplistic, and several qualifications are in order. First, it may happen that total efficiency decreases as a result of price discrimination. For example, if perfect price discrimination is costly, it may be that the gains for the seller do not compensate the losses imposed on consumers. Likewise, it can be shown that spatial price discrimination decreases efficiency when demand curves are linear, for example. Second, there are cases when price discrimination implies a strict Pareto improvement: both the seller and consumers are made better off (more specifically, some are equally well off and some are strictly better off as a result of price discrimination). The examples of damaged goods and bundling, presented in Section 6.2, prove this point. Third, the effects of price discrimination go beyond producer and consumer surplus. In particular, the evidence suggests that, on average, consumers dislike paying different prices (thus the piece of advice I started the chapter with). Some car dealers promise "no haggling" terms of sale, partly because consumers dislike the process of haggling, partly because they dislike the idea of paying a different price than other customers. In this sense, the main thrust of ​prospect theory​ of consumer behavior applies here: consumers like paying a lower price than others, but much more than that they dislike paying a higher price than others. Or, to put it differently, consumers perceive price discrimination as a ​fairness ​issue. The case of Amazon's DVD pricing, summarized in Box 6.5, illustrates one instance of this. PAGINA 154 SUMMARY ● Price discrimination allows the seller to create additional consumer surplus and to capture existing consumer surplus. Its success requires that resale be expensive or impossible. ● Sellers can price discriminate either based on observable buyer characteristics or by inducing buyers to self-select among different product offerings. ● Under discrimination by market segmentation, a seller should charge a lower price in those market segments with greater price elasticity. ● When selling a durable good, sellers may prefer to commit not to price discriminate over time. In fact, due to "strategic" purchase delays, profits may be lower under price discrimination. ● If the seller can set a two-part tariff and all consumers have identical demands, then the (variable) price that maximizes total profits is the same that maximizes total surplus, that is, a price equal to marginal cost. ● A monopolist's optimal two-part tariff consists of a positive fixed fee and a variable fee that is lower than monopoly price. Total surplus is therefore greater than under uniform pricing.