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David J. Bryce David J. Bryce
David J. Bryce David J. Bryce
David J. Bryce David J. Bryce
David J. Bryce
David J. Bryce 2002
Competitive Rivalry
Threat of Substitutes
1. Differentiate Product
Recall from last session that consumer preferences vary If a firm can uniquely satisfy the preferences of some particular group, it creates a steeper demand curve and more flexibility in its pricing By differentiating, the firm may, in effect, create a monopoly within some particular consumer segment
3. Price Discrimination
Price discrimination is charging a higher price to consumers with higher willingness to pay
First degree: price equals willingness to pay for every consumer firm extracts all consumer surplus Second degree: different prices for different quantities Third degree: different prices for different consumer groups
In practice, segment consumers by elasticity of demand raise price for inelastic customers; lower price for elastic customers
Auctions, purchasing a car Airlines, hotels First adopters vs. later ones
David J. Bryce 2002
Demand
Consumer Surplus
Supply
P*
Q*
Price Q(P)=100-P
70
30
30
70
Quantity
2. Prevent inelastic customers from purchasing at the lower price 3. Prevent arbitrage by elastic customers
purchasing at the lower price and reselling to inelastic customers
4. Provide premium features or services that cost less than the price premium (legally, you
must show cost differences to justify the price differences)
David J. Bryce 2002
Examples
Synthetic diamonds used in drill bits are now applied in artificial joints
New entry into drill bits was giving power to buyers New medical device customers (for artificial joints) reduce the effects of drill bit customer power
6. Switching costs
By creating costs to switch from your product to another, you lock-in buyers to repeated purchases and lower their power The price of a potential alternative product must then be lower than the price of your product plus the switching cost
David J. Bryce 2002
Examples
Ink for Inkjet printers customers are locked into ink cartridge types based on their printer purchase; therefore, manufacturers price cartridges high since they have a monopoly in their type of ink cartridge Games for Nintendo Same effect as for ink; once the game console is purchased, customers are locked into Nintendo games; the high prices for games demonstrate this fact Cell phone companies impose a contract period of a year (minimum) and impose a high cost for early withdrawal We will study more about the theory of lock-in and switching costs in a later session
David J. Bryce 2002
2. 3.