Price Discrimination Strategy
Price discrimination strategy is common where a monopoly exists. In this case, the price of goods is higher than in a competitive market. Sellers are required to put a rate fence when using price discrimination strategy. This is to prevent members of a high price market segment from buying goods at a price that is available to customers from a lower price market segment. Price discrimination strategy can be used to increase profits in a monopoy. In a single pricing strategy, the seller charges similar prices. The seller does not differentiate between high class customers and low class customers. In this case, the price discrimination strategy can be used to increase profits. The price discrimination strategy will target two groups. That is the local residents and visitors. The local residents (students and local people) will be required to pay a lower price. On the other hand, the visitors will be required to pay high prices. The students will pay a lower price than other residents in the area as they do not have enough income (O’Sullivan, Sheffrin, Perez &Perez, 2010).
A price ceiling can also be used to control the prices of a product. A price ceiling is a limit imposed by the government on the prices of a particular product. The government imposes price ceiling to protect the consumers from circumstances that could lead to unavailability of goods. Though price ceiling is aimed at protecting the consumer and ensuring constant supply, a price ceiling can lead to problems if the government imposes them for long without ensuring the right control. Price ceiling can lead to negative out come if it is imposed to increase supply. In addition, price ceiling can be misused. This is mainly if the government does not diagnose the prices well. For instance, it can have negative effects if the government diagnoses the prices to be high when the main problem is low supply. In this case, the government wants to implement a price ceiling law because of the high prices of TV cables. Most customers have complaints that the prices of the TV cables are high.
The government has decided to place the price ceiling on cable TV below the current equilibrium price. This move has some negative effects. A price ceiling set below the equilibrium is called binding price ceiling. The binding price ceiling has various effects. First, it affects the supply of the product. This is because suppliers are unable to charge the price they had set. As a result, some of the suppliers might decide to leave the market and hence lead to low supply. On the other hand, the binding price ceiling will increase the demand of the products and quantity bought. This is because the customers will be able to get the products at a cheaper cost. This will in turn make the quantity demanded to exceed the quantity supplied and hence shortage and non price competition. Introducing a new programming that is cheaper will increase the company’s profits. This is because customers will be able to buy more and also the supply will not be low (O’Sullivan, Sheffrin, Perez &Perez, 2010).
Firms react differently in a competitive market if the demand of the product falls. The fall in demand for the products implies low profits for the companies. This is because few people are purchasing the product despite enough supply. The low demand will lead to low prices and hence low profits for the firms. In the short run the firms make low profits and find ways to improve their profit. In the long run, some of the firms might leave the market. Increase in demand leads to increase in prices and quantity. This in turn increases the firms profit in the short run. In the long run, the number of firms entering the market will increase leading to competition (O’Sullivan, Sheffrin, Perez &Perez, 2010).
A cost curve refers to a graph that represents the costs of production as a function of the quantity produced. The long run average cost curve shows the cost per unit of the out put. This is mainly when the input production levels can be varied. The various lines in the long run average curve show the least cost factor that a firm can have. The points above the line can be attained, but the points below the inline cannot be attained. In long term average cost curve, the producer is required to select the right combination of inputs that will give good out put at the lowest cost. Some long run average cost curves are stiff because of high process and lower demand. In this case, the quantity of the products produced is high, but the demand is low. On the other hand, the long run average cost curves may be stiff downwards if the prices are low and the demand is high. If some one purchases a new model of a digital camera immediately after it is released he is likely to pay more than when he buys it after six months. This is a kind of price discrimination because people who buy the digital camera after it is released first in the market pay more unlike those who buy the product six months later. In this case, the seller has developed two types of prices. In price discrimination, the seller offers the same product at different prices. So, this scenario is an example of price discrimination (O’Sullivan, Sheffrin, Perez &Perez, 2010).
The department of justice and the federal trade commission have developed new guidelines to be used to evaluate proposed mergers. The antitrust agencies are supposed to evaluate the competitive impact the mergers will have. The agencies are also supposed to determine whether the mergers proposed comply with the antitrust laws in the country. The guidelines have a major implication on companies that want to form mergers in future as they will be forced to comply with the law. In addition, the guidelines have implications on the government as it will ensure only legitimate mergers are formed (O’Sullivan, Sheffrin, Perez &Perez, 2010).
Reference
O’Sullivan,A.,Sheffrin,S.,Perez,S.J.,&Perez,S.(2010).Survey of economics: principles, applications, and tools.Pearson
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