3. Screening Amine Ouazad - PowerPoint Presentation

1. 3. ScreeningAmine OuazadMicroeconomics C

2. Career ChoicesA real estate broker wishes to hire an agent. He posts a job offer.Initially, the dealer was offering 50,000 euros a year, fixed. What was/were the problem?The compensation is as follows:The salesman gets 1% of all sales, and an additional fixed wage of 30,000 euros.The average price of a house in the area is 150,000 euros. Who accepts the offer?

3. Push a little furtherWhat is the optimal contract?The real estate broker is greedy:max Revenue – Wage.The productive candidate has options:Wage >= productive broker’s outside option.The unproductive candidate has (worse) options:Wage >= unproductive broker’s outside option.What is the optimal wage contract, assuming it is a fixed percentage + a flat wage?

4. OutlineAsymmetric information on the labor market (done)Screening car rental customers:Explicit price discriminationScreening airline customers:Implicit price discriminationScreening eclectic and obsessive customers:Bundling

5. QPMCDemandVariable profit“No money is left on the table”High valuation customersLower valuation customersPerfect Price DiscriminationQPMCDemandMRVariable profitUniform PricingOptimal price“A key step is to avoid uniform pricing. Pricing to specific customer groups should reflect the true competitive value of what is being provided. No money is left on the table...”A. Miles, Pricing, Boston Consulting Group.

6. Spot the Difference

7. 2. Explicit Price DiscriminationCondition #1: Market Power Must have ability to set pricesCondition #2: Observability (No deception) Use an easily observed trait which is correlated with elasticity of demand. Customer cannot masquerade as someone else.Condition #3: No arbitrage/resale Customers from one segment cannot sell good to others.Segment the market by observable characteristics.Charge customers in different segments different prices, according to their elasticity.

8. Explicit Price Discrimination- Condition #2: ObservabilityTourists pay more for kilims in Istanbul than locals.Students get discounts on air/rail tickets.Californians pay $97; non-Californians pay $151 for a 2-day park hopperDell Inspiron 580, Base Configuration: Home:$749 Small Business: $899Victoria’s secret?

9. Condition #3: No Arbitrage

10. MCMRCPCMRC = 90-20QC = 10 = MCQC = 4 PC = $50MRGPGMRG = 60-10QG = 10 = MCQG=5; PG = $35CoalPC = 90 - 10 QCGrainPG= 60 - 5 QG9060Railroad freight pricingU.S. railroads charge 1.5-2 times as much to move coal as they do to move grain MC = $10 per ton; 10Higher choke price → Less Elastic → Higher price

11. OutlineAsymmetric information on the labor marketScreening car rental customers:Explicit price discriminationScreening airline customers:Implicit price discriminationScreening eclectic and obsessive customers:Bundling

12. The Mother of All Discriminatory Pricing: Airline PricingAirlines like to segment the market based on valuations, but valuations are not observed On the other hand, valuations are correlated with time sensitivity In general consumers with higher valuation are less likely to accept: Saturday night stay A 14-day advance ticketing ,..etc. Solution: Create a product line based on artificial restrictions.These simply annoy the customers, and have little or no bearing on their cost of operation2. Implicit Price Discrimination

13. Screening with Differentiated ProductsScenario: Airline has B business customers and L leisure customers.Type of CustomerValuationUnrestrictedRestrictedBusiness$1000$600Leisure$600$500Cost per ticket = $ 300(Same for restricted and unrestricted tickets)– Explicit Market Segmentation –

14. Pricing of Only Unrestricted TicketsOption 1: Charge $1000 and sell only to Business travelers Profit = (1000-300)*B = 700BOption 2: Charge $600 and sell to both Business and LeisureProfit = (600-300)*(B + L) = 300 (B + L)

15. Screening with Restricted & Unrestricted TicketsOption 3: Charge $900 and sell unrestricted tickets to Business travelers Charge $500 and sell restricted tickets to Leisure travelers Profit = (900-300)*B + (500-300)L = 600B + 200LThis is Screening or Implicit Market Segmentation

16. Comparison of 3 Options(A) sell only unrestricted tickets at a price of ___________ to business travelers only;Profit:(B) sell only unrestricted tickets at a price of ____________ to all travelers;Profit:(C) sell unrestricted tickets to business travelers for ____________ and restricted tickets to leisure travelers for __________.Profit:

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18. Even if you cannot explicitly segment the market don’t lose heart – implicitly segment the market!Offer a menu of options and try to come up with a creative screening mechanismTry product differentiation, versioning, inter-temporal pricing, damaging, bundling (see this next time) – these achieve price discriminationWrap Up

19. OutlineAsymmetric information on the labor marketScreening car rental customers:Explicit price discriminationScreening airline customers:Implicit price discriminationScreening eclectic and obsessive customers:Bundling

20. Selling several goods in one bundleHardware and softwareSoftware suitesSports/Concert ticketsAuto accessoriesBundling

21. Exercise 6.6: Screening via BundlingPricing of a two-concert mini season (Wagner and Harbison) at a theater.Highly segmented, with only three types of customers:Type of CustomerValuationWagnerVerdiA$50$5B$40$40C$5$50A customer may go to one or both of the concerts.

22. – Benchmark: Explicit Market Segmentation – – No Bundling –

23. – Pure Bundling – – Mixed Bundling – The Genius of Dell??