Price+discrimination+-&nbsp;Tying+contracts

= = =Price Discrimination= Price discrimination is described as the practice of offering identical goods to different buyers at different prices, when the goods cost the same. Theoretically, this can only be done in the case of a monopoly market. Price discrimination is a term meaning differentiation in price by customer and is not intended as an accusation of criminal or unfair behavior.

Price discrimination typically requires market segmentation and some means to discourage discount customers from becoming resellers and, by extension, competitors. This can be done by making price comparisons difficult or restricting pricing information.

Price discrimination is commonplace where there is no resale, like in services. Senior citizen discounts at museums are good examples.

Price discrimination is also seen when goods are not expected to be completely identical. When there is a "relaxed" view on product requirements or when products are considered "premium products", like cappucino compared to coffee, there will likely be forms of price discrimination not explained by the cost of production. These types of products are usually sold more on a willingness-to-pay basis.

Price Discrimination will typically lead to lower prices for some consumers and higher prices for others. If output remains constant, price discrimination can reduce efficiency through misallocation of output among consumers. If performed successfully, it can allow a seller to transform a portion of consumer surplus with uniform pricing into additional profits.

=**Tying Contracts**= Tying occurs when the seller of Product A will sell A (the tying product) only if the buyer buys Product B (the tied product). Tying contracts theoretically can enable a seller to practice price discrimination. Tying contracts have historically been regarded as anti-competitive.

The implication of this is that one or more components of the package are sold individually by other businesses as their primary product, and thereby this bundling of goods would hurt their business. Also, the company doing this bundling is assumed to have a significantly large market share, so it would hurt the other companies who sell only single components.

In a tying contract, the seller charges all consumers the same fixed price for the tying product (like an mp3 player) but then uses the tied products (headphones, wiring, etc.) to reveal intensity of use and charges a higher per-unit price to buyers with greater intensity. Basically, the tying contract serves a two-part tariff with a fixed charge for the tying product and a variable charge for the tied product.

Tying is often used when the supplier makes one product that is critical to many customers. By threatening to withhold that key product unless others are also purchased, the supplier can increase sales of less necessary products.

Also, most states have laws enforced by state governments against tying. In addition, the U.S. Department of Justice enforces federal laws against tying through its anti-trust division.

=**Example Problems**= 1) Tying was first made potentially illegal in the United States by the . a. Douglas McCarthy Act b. Sherman Antitrust Act c. Healthcare Reform Act d. Monopoly Power Act

2) Price discrimination occurs when different customers are charged different prices for . a. no reason b. wholesale products c.different products d.the same product

3) Tying is often used when the supplier makes one product that is: a.critical to many customers. b.critical to 10% of customers or more. c.unnecessary to less than 10% of customers. d. dominant in the industry

4)Price discrimination typically requires: a. market segmentation b. knowledge of inflation rates c. comparative static analysis d. non-distribution constraints

5) If performed successfully, price discrimination can allow a seller to: a. lower costs of production b. transform a portion of producer surplus into additional profits c. transform a portion of consumer surplus into additional profits d. All of the above

=**Example Answers**= 2) d. the same product 3) a. critical to many customers 4) a. market segmentation 5) c. transform a portion of consumer surplus into additional profits**
 * 1) b. Sherman Antitrust Act

=**Sources**= [1] Santerre, Rexford E. and Neun, Stephen P. "Health Economics - Theories, Insights, and Industry Studies- 4th Ed." [2] en.wikipedia.org/wiki/Price_ceiling

Written by Logan Pilcher and Eric Maroun