Getting into Walt Disney World: One Price Does Not Fit All

2. Getting into Walt Disney World: One Price Does Not Fit All Learning Objectives In this chapter, we will study some common pricing strategies, and we will see how Disney and other firms use these strategies to increase their profits.

3. Learning Objective 15.1 Pricing Strategy, the Law of One Price, and Arbitrage Arbitrage Transactions costs The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.

4. Learning Objective 15-1 15-1 Solved Problem Is Arbitrage Just a Rip-off? Does eBay serve a useful economic purpose? Economists would say that it does.

5. Learning Objective 15.1 Pricing Strategy, the Law of One Price, and Arbitrage Why Don’t All Firms Charge the Same Price? Table 15-1 Which Internet Bookseller Would You Buy From?

6. Learning Objective 15.2 Price Discrimination: Charging Different Prices for the Same Product Price discrimination Charging different prices to different customers for the same product when the price differences are not due to differences in cost. Don’t Let This Happen to YOU!Don’t Confuse Price Discrimination with Other Types of Discrimination

7. Learning Objective 15.2 Price Discrimination: Charging Different Prices for the Same Product The Requirements for Successful Price Discrimination A successful strategy of price discrimination has three requirements: 1 A firm must possess market power. 2 Some consumers must have a greater willingness to pay for the product than other consumers, and the firm must be able to know what prices customers are willing to pay. 3 The firm must be able to divide up—or segment—the market for the product so that consumers who buy the product at a low price are not able to resell it at a high price. In other words, price discrimination will not work if arbitrage is possible.

8. Learning Objective 15.2 Price Discrimination: Charging Different Prices for the Same Product The Requirements for Successful Price Discrimination FIGURE 15-1 Price Discrimination by a Movie Theater

9. Learning Objective 15-2 15-2 Solved Problem How Dell Computer Uses Price Discrimination to Increase Profits

10. Learning Objective 15.2 Price Discrimination: Charging Different Prices for the Same Product Airlines: The Kings of Price Discrimination FIGURE 15-2 33 Customers and 27 Different Prices

11. Learning Objective 15.2 MakingtheConnection • How Colleges Use Yield Management Some colleges use yield management techniques to determine financial aid.

12. Learning Objective 15.2 Price Discrimination: Charging Different Prices for the Same Product Perfect Price Discrimination FIGURE 15-3 Perfect Price Discrimination

13. Learning Objective 15.2 Price Discrimination: Charging Different Prices for the Same Product Price Discrimination across Time FIGURE 15-4 Price Discriminationacross Time

14. Learning Objective 15.2 Price Discrimination: Charging Different Prices for the Same Product Can Price Discrimination Be Illegal? In 1936, Congress passed the Robinson–Patman Act, which outlawed price discrimination that reduced competition, but which also contained language that could be interpreted as making illegal all price discrimination not based on differences in cost.

15. Learning Objective 15.2 MakingtheConnection • Price Discrimination with a Twist at Netflix Why does renting only a few movies get you better service on Netflix?

16. Learning Objective 15.3 Other Pricing Strategies Odd Pricing: Why Is the Price $2.99 Instead of $3.00? Many firms use what is called odd pricing—for example, charging $4.95 instead of $5.00, or $199 instead of $200. Do consumers have an illusion that a price of $9.99 is significantly cheaper than $10.00? There is some evidence that using odd prices makes economic sense.

17. Learning Objective 15.3 Other Pricing Strategies Why Do Firms Use Cost-Plus Pricing? Economists conclude that cost-plus pricing may be the best way to determine the optimal price in two situations: 1 When marginal cost and average cost are roughly equal 2 When the firm has difficulty estimating its demand curve

18. Learning Objective 15.3 MakingtheConnection • Cost-Plus Pricing in the Publishing Industry

19. Learning Objective 15.3 Other Pricing Strategies Pricing with Two-Part Tariffs Two-part tariff A situation in which consumers pay one price (or tariff) for the right to buy as much of a related good as they want at a second price.

20. Learning Objective 15.3 Other Pricing Strategies Pricing with Two-Part Tariffs FIGURE 15-5 A Two-Part Tariff at Disney World

21. Learning Objective 15.3 Other Pricing Strategies Pricing with Two-Part Tariffs Table 15-2 Disney’s Profits per Day from Different Pricing Strategies

22. Learning Objective 15.3 Other Pricing Strategies Pricing with Two-Part Tariffs It is important to note the following about the outcome of a firm using an optimal two-part tariff: 1 Because price equals marginal cost at the level of output supplied, the outcome is economically efficient. 2 All of consumer surplus is transformed into profit. The rides at Disney World are free—once you have paid to get into the park.

23. College Tuition: One Price Does Not Fit All LOOK An Inside Amid Rising Costs and Criticism, Some Colleges Cut Back Merit Aid

24. K e y T e r m s Price discriminationTransactions costsTwo-part tariff