Market power and pricing strategies

6 important questions on Market power and pricing strategies

Requirements to persue pricing strategy

1. Firm must have market power
2. Firm must prevent customers from resale and arbitrage (reselling product at price higher than original)

Strategies for customers with different demand

1. Can firm identify its customers' demand before they buy?
2. Can firm identify its customers' differing demands only after they make a purchase?

Direct price discrimination

Pricing strategy in which firms charge different prices to different customers based on observable characteristics of customers
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Indirect price discrimination

Pricing strategy in which customers pick among variety of pricing options offered by firm

When indirect price discrimination

1. Firm has market power can prevent resale
2. Firm's customers have different demand curves
3. Firm can't directly identify which type of demand before purchase

Ways to execute indirect price discrimination

1. Quantity discounts
2. Incentive compatibility

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