Q3. One example of price discrimination occurs in the publishing industry when a publisher initially releases an expensive hardcover edition of a popular novel, and later releases a cheaper paperback edition. Use this example to demonstrate the benefits and potential pitfalls of a price discrimination pricing strategy.
In publish industry publishers usually first release hard cover version of a new book with high price and later in some months they release a cheaper paperback version. Publisher segments readers into two groups, there are first the readers who are especially eager to read the book and can afford to pay the higher price as well as secondly, the readers who are not ready to pay the higher price or lack of sufficient interest. Hard cover and paper cover books are therefore used to fill up the gap of those readers. This could raise the issue of the same or similar product but two different prices (Gans et al. 2009).
The price discrimination explains that when the ration of the prices of two similar products of the same product is different to the ratio of their marginal costs when set up hardback and paper back. In publisher case of price discrimination, the readers who are not interested in and insufficient to afford can buy paperback at lower price gain benefit. However, consumer surplus is reduced by loss of consumer welfare because the price charged is significantly above marginal cost of product. The inelastic demand leads to monopoly power therefore welfare is reduced and monopoly pricing power is being used (Elegido, 2009). By reducing consumer surplus and dead weight loss, publishers can charge different price for each segment that willing to pay in order to maximize profit.
Q.6 The following table illustrates the growth related profits matrix of two discount superstores
Super Duper Saver
Increase the size of store Do not increase the size of
and parking lot store and parking lot
Increase the size of
store and parking lot
Do not increase the
size of the store
and parking lot
Dominant strategy is the best option that the player can follow in order to achieve the best outcome regardless of the strategies that selected by the other players in under the same scenario (Gans et al. 2009). If all players have a dominant strategy, then it is natural for them to choose the dominant strategies and can reach dominant strategy equilibrium (Chung and Ely, 2006).
According to the case of two discount superstores, Ultimate Saver and Super Duper Saver are interested in expanding the size of their stores and parking lots. Considering to the dominant strategy of Ultimate Saver to follow is increasing the size of store and parking lot considering the result of amounts of growth related profits amount $85 is greater than $55 as well as $295 is greater than $155 regardless strategy chosen by Super Duper saver. Hence, increase the size of the store and parking lot is the best strategy of Ultimate Saver under the scenario.
Taking into consideration to Super Duper Saver, to increase the size of the store and parking lot is its dominant strategy as well, as the result of the amount of the growth relate profit depicted that $70 is larger than $45 as well as $270 is greater than $105 regardless strategy followed by Ultimate Saver.
To conclude, under this circumstance the dominant strategy of both superstores will be chosen to play in order to protect their losses and keep their profit are increasing the size of stores and parking lots regardless of the strategies that selected by the another side.
Even if there is $155 of growth related profit for Ultimate Saver when both super stores do not expend size and car space, but when one increases size and parking lot that will affect on another store's profit. Ultimate Saver could maximize profit at $295 if Super Duper Saver does nothing and Ultimate Saver decides to increase store and parking lot. However, if Ultimate Saver does nothing, profit will be lost to $55 if Super Duper Saver decides to expend store and car park. According to the matrix above, to increase the size of the store and parking lot is the best solution if both stores chose the dominant strategy, and hence 85 dollars is growth related profit for Ultimate Saver.
Even if there is $105 of growth related profit for Super Duper Saver when both super stores do not expand size and car space, but when one increases size and parking lot that will affect on another store's profit. Super Duper Saver could maximize profit at $270 if Ultimate Saver does nothing and Super Duper Saver decides to increase store and parking lot. However, if Super Duper Saver does nothing, profit will be lost to $45 if Ultimate Saver decides to expand store and parking lot. Considering the growth related profit for Super Duper Saver is 70 dollars if both stores decide to follow their dominant strategy. Due to and increase the size of the store and parking lot is dominant strategy for both stores.
By choosing dominant strategy, both superstores, Super Duper Sever and Ultimate Saver can have growth related profit $70 and $85 relatively as well as it is the best solution for both super store strategy that can make the best outcome. The situation will change if there was however a meeting for discussing optimized profit and strategy of each company, the strategy of do not increase size of store and parking lot are the most preferable and the best choice for them. This circumstance could happen if both have agreement of doing not expand their store and parking lot and stick to it. Nevertheless, if one of them breaks agreement, one will benefit while another one will lose profit and the situation will become dominate strategy of game theory again. By so doing, even stores can earn profit however well-being of social welfare will be affected. If both super stores decide to expend store and parking lot the customers will be convenient to shop and they will have enough space for car to park. On the other hands, if Ultimate Saver and Super Duper Saver have collusive agreement not to increase store and car space the customers will find it inconvenient for shopping and car parking.
Chung K.S, Ely J.C. “Foundations of Dominant Strategy Mechanisms” (10 July, 2006). Retrieved: 20 May 2010 from http://faculty.wcas.northwestern.edu/~jel292/minmax.pdf
Elegido J. “The Ethic of Price Discrimination” (5 August, 2009). Retrieved: 20 May 2010 from http://www.benafrica.org/downloads/Elegido,%20Juan.pdf
Gans, J., King, S. and Mankiw, N.G. (2009). “Principles of Microeconomics”, 4th Ed. South Melbourne, Vic.: Cengage Learning Australia.