5. Block pricing
Demand of an
individual consumer
2
1.5
1.25
1
0.5
MC
D
3
MR
Q
6
Each consumer values units up to #6 above MC.
We can take advantage of that fact by offering this product
ONLY as a six-pack.
Pricing the 6-pack:
A customer would pay:
Up to $1.75 for the first unit;
Up to $1.50 for the second;
Up to $1.25 for the third;
Up to $1.00 for the fourth;
Up to $0.75 for the fifth;
Up to $0.50 for the sixth.
(units after #6 are not worth producing)
Total value consumer places on a six-pack is $6.75.
That is the price we should charge.
5. Block pricing
2
1.5
1.25
1
0.5
MC
D
3
MR
Q
6
Profit under block pricing and under regular pricing
6. Two-part pricing
P
Demand of an
individual consumer
60
35
MC
10
D
10
MR
Q
20
Under ‘regular’ pricing:
The profit-maximizing point is P = $35, Q = 10, Π = $250
6. Two-part pricing
P
Demand of an
individual consumer
60
35
MC
10
D
10
MR
Q
20
A better idea:
Charge the same price + add a one-time fee equal to
consumer’s CS from purchase
6. Two-part pricing
P
Demand of an
individual consumer
60
35
MC
10
D
10
MR
Q
20
An even better idea: lower the per-unit price (P=MC=$10)
and keep charging the fee (which will now be larger).
As a result, you would get more profit.
The i-Phone case
Prices are falling over time – WHY?
Possible explanations:
- Obsolescence – Better products developed – demand drops
- More firms enter – stronger competition – profit margin drops
- More efficient production technologies developed – production
costs drop – price drops
- “Intertemporal price discrimination”, or separating customers
across time, based on their patience factor
$
Demand from all the consumers
who will ever want your product
MC
Q
$
Demand from all the consumers
who will ever want your product
MC
Q
You could satisfy them all at once…
$
July
June
May
April
Demand from all the consumers
who will ever want your product
MC
Q
… or, you could serve them one group at a time,
starting with those who value the good the most
$
Demand from all the consumers
who will ever want your product
MC
Q