Amine Ouazad Microeconomics C Career Choices A real estate broker wishes to hire an agent He posts a job offer Initially the dealer was offering 50000 euros a year fixed What waswere the problem ID: 572224
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Slide1
3. Screening
Amine Ouazad
Microeconomics CSlide2
Career Choices
A 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?Slide3
Push a little further
What 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?Slide4
Outline
Asymmetric information on the
labor
market (done)
Screening car rental customers:
Explicit price discrimination
Screening airline customers:
Implicit price discrimination
Screening eclectic and obsessive customers:
BundlingSlide5
Q
P
MC
Demand
Variable profit
“No money is left on the table”
High valuation customers
Lower valuation customers
Perfect Price Discrimination
Q
P
MC
Demand
MR
Variable profit
Uniform Pricing
Optimal 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.Slide6
Spot the DifferenceSlide7
2. Explicit Price Discrimination
Condition #1: Market Power
Must have ability to set prices
Condition #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.Slide8
Explicit Price Discrimination
- Condition #2: Observability
Tourists 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 hopper
Dell Inspiron 580, Base Configuration: Home:$749 Small Business: $899
Victoria
’
s secret?Slide9
Condition #3: No ArbitrageSlide10
MC
MR
C
P
C
MR
C
= 90-20Q
C
= 10 = MC
Q
C
=
4
P
C
=
$50
MR
G
P
G
MR
G
= 60-10Q
G
= 10 = MC
Q
G
=
5; PG = $35
CoalPC = 90 - 10 QC
Grain
P
G
= 60 - 5 QG
90
60
Railroad freight pricing
U.S. railroads charge 1.5-2 times as much
to move coal as they do to move grain MC = $10 per ton;
10
Higher choke price
→ Less Elastic
→
Higher price
Slide11
Outline
Asymmetric information on the labor market
Screening car rental customers:
Explicit price discrimination
Screening airline customers:
Implicit price discrimination
Screening eclectic and obsessive customers:
BundlingSlide12
The Mother of All Discriminatory Pricing: Airline Pricing
Airlines 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 operation
2. Implicit Price DiscriminationSlide13
Screening with Differentiated Products
Scenario: Airline has
B
business customers and
L
leisure customers.
Type of Customer
Valuation
Unrestricted
Restricted
Business
$1000
$600
Leisure
$600
$500
Cost per ticket = $ 300
(Same for restricted and unrestricted tickets)
– Explicit Market Segmentation – Slide14
Pricing of Only Unrestricted Tickets
Option 1
: Charge $1000 and sell only to Business travelers
Profit = (1000-300)*B = 700B
Option 2:
Charge $600 and sell to both Business and Leisure
Profit = (600-300)*(B + L) = 300 (B + L)Slide15
Screening with Restricted & Unrestricted Tickets
Option 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 + 200L
This is Screening or Implicit Market SegmentationSlide16
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:Slide17Slide18
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 mechanism
Try product differentiation, versioning, inter-temporal pricing, damaging, bundling (see this next time) – these achieve price discrimination
Wrap UpSlide19
Outline
Asymmetric information on the labor market
Screening car rental customers:
Explicit price discrimination
Screening airline customers:
Implicit price discrimination
Screening eclectic and obsessive customers:
BundlingSlide20
Selling several goods in one bundle
Hardware and software
Software suites
Sports/Concert tickets
Auto accessories
BundlingSlide21
Exercise 6.6: Screening via Bundling
Pricing of a two-concert mini season (Wagner and Harbison) at a theater.
Highly segmented, with only three types of customers:
Type of Customer
Valuation
Wagner
Verdi
A
$50
$5
B
$40
$40
C
$5
$50
A customer may go to one or both of the concerts.Slide22
– Benchmark: Explicit Market Segmentation –
– No Bundling – Slide23
– Pure Bundling –
– Mixed Bundling –
The Genius of Dell??