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Lecture 2
Economies of Scale
The production process for a specific good or service exhibits economies of scale
over a range of output when average cost (i
...
, cost per unit of output) declines
over that range
...
If average
cost is increasing, then marginal cost must exceed average cost, and we say that
production exhibits diseconomies of scale
...

Sometimes, production exhibits U-shaped average costs in the short run, as firms
that try to expand output run up against capacity constraints
...

Economies of Scope
Economies of scope exist if the firm achieves savings as it increases the variety of
goods and services it produces
...

Then a production process exhibits scope economies if:
TC(Qx,Qy) < TC(Qx,0) + TC(0,Qy)
This formula captures the idea that it is cheaper for a single firm to produce both
goods X and Y than for one firm to produce X and another to produce Y
...
Then,
rearrange the preceding formula to read:
TC(Qx,Qy) – TC(0,Qy) < TC(Qx,0)
This says that the incremental cost of producing Qx units of good X, as opposed to
none at all, is lower when the firm is producing a positive quantity Qy of good Y
...
Fixed costs arise when there are indivisibilities
in the production process
...

Economies of Scale Due to Trade-offs among Alternative Technologies
The fully automated technology has lower average total costs (yields greatest cost
savings) at high production levels (when used to capacity), but it may not be the
best choice (costlier) at lower production levels
...
At output levels above
375 million, the fully automated technology has lower average total costs
...


Reductions in average costs due to increases in capacity utilization are short-run
economies of scale in that they occur within a plant of a given size
...
Given time to build a plant from scratch, a firm can
choose the plant that best meets its production needs, avoiding excessive fixed
costs if production is expected to be low, and excessive capacity costs if production
is expected to be high
...
The long-run average cost curve is everywhere
on or below each short-run average cost curve
...


Regardless of plant size, firms that plan on exploiting scale economies must achieve
the necessary throughput
...

Indivisibilities Are More Likely When Production Is Capital Intensive
• Substantial product-specific economies of scale are likely when production is
capital intensive
...
As long as there is spare capacity, output
can be expanded at little additional expense
...

• Minimal product-specific economies of scale are likely when production is
materials or labor intensive
...
There are many
instances where labor expenses should be treated as fixed costs
...

Economies of scale are closely related to the concept of specialization
...
One additional implication of
Smith’s theorem is that larger markets will support narrower specialization
...
97}
Economics of density 

Purchasing 

Advertising 

Research and development 

Physical properties of production 

Inventories 

The first four rely entirely or in part on spreading of fixed costs
...

Sources of Diseconomies
Labor costs

Spreading resources too thin
Bureaucracy
The Concept of the Learning Curve
The learning curve (or experience curve) refers to advantages that flow from
accumulating experience and know-how
...


The magnitude of learning benefits is often expressed in terms of a slope
...

Suppose next that the firm’s cumulative output doubles to 2Qx with average cost
of AC2
...


Slopes have been estimated for hundreds of products
...
80, implying that for the typical firm, doubling cumulative output
reduces unit costs by about 20 percent
...

This is likely to be the case in simple capital-intensive activities
...
This is
likely to be the case in complex labor-intensive activities
...
Consequently, to maximize profits a manager
must take into account the likely impact of his or her decisions on the behavior of
other managers in the industry
...

Overview of games and strategic thinking
In a game, the players are individuals who make decisions
...
The payoffs to the players are the profits or
losses that result from the strategies
...

Order in which players make decisions
In a simultaneous-move game, each player makes decisions without knowledge of
the other players' decisions
...
g
...

In a sequential-move game, one player makes a move after observing the other
player's move
...
g
...

It is also important to distinguish between one-shot games and repeated games
...
In a repeated game, the
underlying game is played more than once
...
g
...
4}
Key definitions:
A strategy is a decision rule that describes the actions a player will take at each
decision point
...


In simultaneous-move, one-shot games where a player has a dominant strategy,
the optimal decision is to choose the dominant strategy
...

A strategy is a dominant strategy if it results in the highest payoff regardless of the
action of the opponent
...

To find a secure strategy, a player examines the worst payoff that could arise for
each of his or her actions and chooses the action that has the highest of these worst
payoffs
...
Second, it does not take into account
the optimal decisions of your rival and thus may prevent you from earning a
significantly higher payoff
...
If your rival has a dominant strategy, anticipate that he or she will play
it
...

Every player is doing the best he or she can, given what other players are doing
...
The outcome of the game is that
both firms charge low prices and earn profits of zero
...
This is a classic result in economics and is called a dilemma
because the Nash equilibrium outcome is inferior (from the viewpoint of the firms)

to the situation where they both "agree" to charge high prices
...

Firms cannot collude and agree to charge high prices because collusion is illegal in
the United States and the firms have an incentive to cheat
...
An increase in one firm's
advertising increases its profits at the expense of other firms in the market; there
is interdependency among the advertising decisions of firms
...

Game of 120 and 90 volt appliances
There are two Nash equilibria
...
If the
firms could "talk" to each other, they could agree to produce 120-volt systems
...
In effect, this would allow the
firms to "coordinate" their decisions
...
This game is not
analogous to the pricing or advertising games; it is a game of coordination rather
than a game of conflicting interests
...

Games of Chicken arise in economics when two firms compete in a market that can
profitably support only one firm (natural monopoly markets)
...


SUMMARY: HOW TO FIND ALL THE NASH EQUILIBRIA IN A SIMULTANEOUS-MOVE
GAME WITH TWO PLAYERS
1
...


2
...
We then find Player 2's best response to Player 1's
dominant strategy to identify Player 2's Nash equilibrium strategy
...
If neither player has a dominant strategy, we successively eliminate each player's
dominated strategies in order to simplify the game, and then search for Nash
equilibrium strategies
...
If neither player has dominated strategies, we identify Player 1's best response
to each of Player 2 's strategies and then identify Player 2's best response to
each of Player l's strategies
...


The repeated prisoners’ dilemma
Prisoners' dilemma is a one-shot game, where the individual pursuit of profit
maximization does not necessarily result in the maximization of the collective profit
of a group of players
...


If Player 1 places sufficiently strong weight on future payoffs relative to current
payoffs, Player 1 will prefer continued cooperation to cheating
...
That is, they value payoffs in future periods almost as
much as payoffs in the current period
...

• Interactions between the players are frequent
...

• Cheating is easy to detect
...

• The one-time gain from cheating is relatively small
...


Sequential-move games and strategic moves
One player (the first mover) takes an action before another player (the second
mover)
...
E
...
the Stackelberg model of oligopoly
...

To solve sequential games, we use backward induction - A procedure for solving a
sequential-move game by starting at the end of the game tree and finding the
optimal decision for the player at each decision point
...

Firms also compete indirectly, when the strategic choices of one affect the
performance of the other, but only through the strategic choices of a third firm
...

A market is well defined, and all of the competitors within it are identified, if a
merger among them would lead to a small but significant nontransitory increase in
price
...
“Small” is usually defined to be “more
than 5 percent,” and “nontransitory” is usually defined to be “at least one year
...

The SSNIP criterion is based on the economic concept of substitutes
...

At an intuitive level, products tend to be close substitutes when three conditions
hold:
They have the same or similar product performance characteristics (what it does
for consumers)
...

They are sold in the same geographic market (two products are in different
geographic markets if (a) they are sold in different locations, (b) it is costly to
transport the goods, and (c) it is costly for consumers to travel to buy the goods)
...

When this is positive, it indicates that consumers increase their purchases of good
Y as the price of good X increases
...


Measuring market structure
Markets are often characterized according to the degree of seller concentration
...
A
common measure of market structure is the N-firm concentration ratio
...
One problem
with the N-firm ratio is that it is invariant to changes in the sizes of the largest firms
...

The Herfindahl index avoids this problem
...
The Herfindahl index in a market with
N equal-size firms is 1/N
...


Perfect Competition
A firm maximizes profit by producing a volume of output at which marginal revenue
equals marginal cost
...
The condition for profit
maximization can then be written

...
In other words, firms expand
output until marginal cost of the last unit produced equals the market price
...

Market conditions will tend to drive down prices toward marginal costs when at
least two of the following conditions are met: {book pg
...


• Consumers perceive the product to be homogeneous
...



Monopoly
Monopoly power is “the ability to act in an unconstrained way,” such as increasing
price or reducing quality
...

A firm is a monopsonist if it faces little or no competition in one of its input markets
...

A monopolist faces downward-sloping demand, implying that as it raises price, it
sells fewer units
...

What distinguishes a monopolist is not the fact that it faces downward-sloping
demand, but rather that it can set price with little regard to how other firms will
respond
...

Monopolistic Competition
Two main features:
• There are many sellers
...

• Each seller offers a differentiated product
...
The notion of product
differentiation captures the idea that consumers make choices among
competing products on the basis of factors other than just price
...


A product is vertically differentiated when it is unambiguously better or worse than
competing products
...
The degree of horizontal differentiation
depends on the magnitude of consumer search costs, that is, how easy or hard it is
for consumers to learn about alternatives
...

When product differentiation enables sellers to set prices well above marginal
costs, new entrants will steal market share from incumbents and drive down
incumbents’ profits, even if price remains unchanged
...
Exit by some firms will restore the survivors to profitability
...

Cournot Quantity Competition
In Cournot’s model, the sole strategic choice of each firm is the amount they choose
to produce, Q1 and Q2
...
” The market price is that which
enables both firms to sell all their output
...

Each firm’s optimal level of production is the best response to the level it expects
its rival to choose
...


It turns out that only one pair of outputs is simultaneously the best response to
each other
...

If both firms are “out of equilibrium” in the sense that at least one firm has chosen
to produce a quantity other than the equilibrium quantity
...
As a result, we would expect each firm to adjust to the
other firm’s choices
...
A Cournot firm benefits when it’s rival’s costs go up
...
e
...

E
...
Automobile, aircraft and manufacturing industries
...
Industry profit is maximized at the monopoly quantity and price
...
This is characteristic of
oligopolistic industries: The pursuit of individual self-interest does not maximize
the profits of the group as a whole
...
When one firm expands its output, it reduces the market price
...
This is known as the revenue destruction effect
...

The revenue destruction effect also explains why the Cournot equilibrium price falls
as the number of firms in the market increases
...

The equilibrium price and profit per firm decline as the number of firms increases
...
Thus, the
less concentrated the industry (the lower the industry’s H), the smaller will be PCMs
in equilibrium
...
Each firm also believes that its pricing practices
will not affect the pricing of its rival; each firm views its rival’s price as fixed
...

Assumptions:
Like the Cournot, the Bertrand focuses on a static or simultaneous model of price
competition limited to a single market period
...
Each produces identical goods at the same, constant
marginal cost c
...


{Read Pepall chapter 10, 10
...
As long as both firms set prices that exceed marginal costs, one firm will
always have an incentive to slightly undercut its competitor
...
At these prices, neither firm
can do better by changing its price
...
If either firm raises price, it would sell nothing
...
The only difference is that here,
instead of many small firms, we have just two firms each of which is large enough
relative to the market
...
g
...
As a result, they set prices
less aggressively than Bertrand competitors
...
The Bertrand model pertains to
markets in which capacity is sufficiently flexible that firms can meet all of the
demand that arises at the prices they announce
...
g
...
Because many consumers perceive the airlines as selling
undifferentiated products, each airline can fill empty seats by undercutting rivals’
prices and stealing their customers
...
During boom times, airlines
operate near capacity and have little incentive to cut prices
...
Competition
resembles Cournot’s model and allows the airlines to be profitable
...


This is not true for two reasons:
• Typically, the rival firm does not have the capacity to serve all the customers
who demand the product or service at its low price
...

The strategy combination (p1 = c, p2 = c) cannot be the Nash equilibrium if there are
capacity constraints
...
2}
...
With capacity constraints the outcome moves
closer to the outcome in Cournot model
...
Price competition may be limited if one or both firms
runs up against a capacity constraint and cannot readily steal market share, or if
the firms learn to stop competing on the basis of price
...
Differentiated Bertrand reaction functions are
upward sloping
...
In this sense, “aggressive” behavior by one firm
(price cutting) is met by “aggressive” behavior by rivals
...
{book pg
...
In
principle, these games can have many rounds of play, which are often called stages
...
Typically, one firm will play in the first round, the first mover, and
the other will play in the second round, the second mover
...

The Stackelberg model of quantity competition
Similar to the Cournot model, except, both firms choose quantities but now they
do so sequentially rather than simultaneously
...
The firm that moves second is the
follower firm
...

Both firms are rational and strategic and both firms know this, and know that
each other knows this
...
In other words,
firm 1 will work out firm 2's best response to each value of q1, incorporate that
best response into its own decision-making and then choose the q1 option which,
given firm 2's best response, maximizes firm 1's profit
...
This is a well-known feature of the
Stackelberg model when demand is linear and costs are constant
...

Accordingly, the equilibrium price is lower in the Stackelberg model than it is in
the Cournot model
...
They produce identical goods and do so at the same,
constant unit cost
...
Comparing q1* and q2* reveals that the leader gets a far larger
market share and earns a much larger profit than does the follower
...
Prices again fall to marginal cost
...
Entrants threaten incumbents,
that is, the firms that were already in the market, in two ways
...
Second, entry often intensifies competition,
leading to lower prices
...
In such cases we say that the market is
contestable
...

Entry is pervasive in many industries and may take many forms:
• An entrant may be a new firm, that is, one that did not exist before it entered
a market
...

Exit is the reverse of entry—the withdrawal of a product from a market, either by
a firm that shuts down completely or by a firm that continues to operate in other
markets
...
S
...
By 2017, between 30 and 40 new firms will
enter, with combined annual sales of $12 to $20 million
...


• Entrants and exiters tend to be smaller than established firms
...

Entrants diversifying from another industry tend to be about the same size
as the average incumbent
...

• Most entrants do not survive 10 years, but those that do grow precipitously
...
The survivors will nearly double their size by
2022
...
Many industries have high entry rates
including apparel, lumber, and fabricated metals
...
Industries with little entry
included tobacco, paper, and primary metals
...
Entry and exit are highly related:
Conditions that encourage entry also foster exit
...
The entrant must sink some capital that cannot be fully
recovered upon exit—it is this element of risk that makes the entry decision
difficult
...
e
...
There are many potential
sunk costs to enter a market, ranging from the costs of specialized capital
equipment to government licenses
...
Postentry competition represents the conduct
and performance of firms in the market after entry has occurred
...
The sum total of this analysis of sunk costs
and postentry competition determines whether there are barriers to entry
...
Barriers to entry allow incumbent firms to earn positive economic
profits while making it unprofitable for newcomers to enter the industry
...

Structural entry barriers exist when the incumbent has natural cost or marketing
advantages, or when the incumbent benefits from favorable regulations
...

Whether structural or strategic, these entry barriers either raise sunk entry costs
or reduce postentry profitability
...

Blockaded Entry Entry is blockaded if structural barriers are so high that the
incumbent need do nothing to deter entry
...

Accommodated Entry Entry is accommodated if structural entry barriers are low,
and either (a) entry-deterring strategies will be ineffective or (b) the cost to
the
incumbent of trying to deter entry exceeds the benefits it could gain from keeping
the entrant out
...
Entry is so attractive in such markets that the
incumbent(s) should not waste resources trying to prevent it
...
Such entry-deterring strategies are called
predatory acts
...

Analyzing Entry Conditions: The Asymmetry Requirement
What is the strategic distinction between entrants and incumbents? {book pg
...

Economies of Scale and Scope

When economies of scale are significant, established firms operating at or beyond
the minimum efficient scale (MES) will have a substantial cost advantage over
smaller entrants
...
Diversified incumbents may also enjoy scope economies
...

Incumbents have established brand names that give them marketing economies
...
The umbrella effect may also help the
incumbent negotiate the vertical chain
...

Exit barriers drive a wedge between Pexit and Pentry
...


Exit barriers often stem from sunk costs, such as when firms have obligations that
they must meet whether or not they cease operations
...
g
...
Governments can also pose barriers to
exit
...
In general, entry-deterring
strategies are worth considering if two conditions are met:
• The incumbent earns higher profits as a monopolist than it does as a
duopolist
...


Limit Pricing {book pg
...

Two types of limit pricing:
Contestable limit pricing
• Incumbent has excess capacity and can set prices below entrant’s marginal
cost
...

Strategic limit pricing
• Incumbent has limited capacity or rising marginal costs
...

• Low price can be an entry deterrent if entrant infers that post entry price will
be low
...
In the real world, the potential
entrant may hang around indefinitely, forcing the incumbent to set the limit
price indefinitely
...

• We may also question the assumption that by setting a limit price, the
incumbent is able to influence the entrant’s expectations about the nature
of postentry competition
...
The purpose of predatory pricing is twofold: to drive out
current rivals and to make future rivals think twice about entry
...

The Chain-Store Paradox

The striking conclusion: in a world with a finite time horizon in which entrants can
accurately predict the future course of pricing, we should not observe predatory
pricing
...

Rescuing Limit Pricing and Predation: The Importance of Uncertainty and
Reputation
• Firms set prices irrationally
...
For example, the entrant
might not be certain whether market demand is “meeting expectations” or
is “below expectations
...
” If market demand is low, or the incumbent has
low costs, then it might be sensible for the incumbent to set a low price
without regard to strategic considerations
...
It may even be possible that the incumbent is trying to maximize
sales rather than profits
...
Remember,
this approach only works if the entrant is uncertain about the market demand, the
incumbent’s costs, or the incumbent’s motivations
...
An
entrant might come into the market and slash prices
...

Predation and Capacity Expansion
Predatory pricing will not deter entry if the predator lacks the capacity to meet the
increase in customer demand
...
Excess capacity makes the threat of predation credible
...
This gives it an
advantage in the event of entry and a subsequent price war
...
Otherwise, demand will quickly out strip
capacity
...
Otherwise,
the entrant might force the incumbent to back off in the event of a price war
...


Strategic Bundling 

An incumbent firm that dominates one market can use its power to block entry into
related markets through a practice known as strategic bundling
...
Examples abound: McDonald’s Happy
Meals bundle sandwiches, French fries, and soft drinks
...


In some cases, bundling can be used strategically to deter entry
...
Strategic bundling works by giving consumers little choice but to
buy the entire bundle from the incumbent rather than buy the monopolized good
from the incumbent and the second good from competing firms
...
Sometimes, however, smaller
firms and potential entrants can use the incumbent’s size to their own advantage
...
” One theoretical rationale for judo economics—
the revenue destruction effect
...


The theory of contestable markets states that the mere threat of entry can force
the incumbent to lower prices
...
If the incumbent raised price above the entrant’s average cost, there
would be immediate entry and price would fall
...


Lecture 7
Under Cournot, Bertrand, and Stackelberg models total industry profits are less
than what could be achieved if the firms acted like a cartel, choosing the monopoly
price and output
...
Antitrust laws prohibit open coordination of market prices and
quantities, and the penalties for collusion are severe
...
{book pg
...
Once a market “leader”
sets the collusive price, the others will follow
...
This is
known as tit-for-tat pricing
...
In each subsequent
period, if any firm deviates from PM, we will drop our price to marginal cost in the
next period and keep it there forever
...
” It is nice in that it is never the first to defect from the cooperative
outcome
...
It is
forgiving in that if the rival returns to the cooperative strategy, tit-for-tat will too
...

*A small discount rate makes the present value of the annuity from cooperative
pricing larger and favors a cooperative outcome 

The folk theorem implies that cooperative pricing behavior is a possible outcome
in an oligopolistic industry, even if all firms act unilaterally
...
Focal points are
highly context- or situation-specific
...
Coordination is likely to be difficult in competitive environments that are
turbulent and rapidly changing
...

But rivals will sometimes misread their rivals
...

Lumpiness of Orders
Orders are lumpy when sales occur relatively infrequently in large batches as
opposed to being smoothly distributed over the year
...
Lumpy orders reduce the frequency of competitive
interactions between firms, lengthen the time required for competitors to react to
price reductions, and thereby make price cutting more attractive
...
For example, all airlines closely
monitor each other’s prices using computerized reservation systems and
immediately know when a carrier has cut fares
...
Because
retaliation can occur more quickly when prices are public than when they are
secret, price cutting to steal market share from competitors is likely to be less
attractive, enhancing the chances that cooperative pricing can be sustained
...

Deviations from cooperative pricing are also difficult to detect when product
attributes are customized to individual buyers, as in airframe manufacturing
...

Volatility of Demand Conditions
Price cutting is harder to verify when market demand conditions are volatile and a
firm can observe only its own volume and not that of its rival
...
During times of excess capacity, the temptation to
cut price to steal business can be high
...
If other firms see the price cut but cannot detect
their rival’s volume reduction, they may misread the situation as an effort to steal
business
...

When firms are identical, a single monopoly price can be a focal point
...


The firm with the lower marginal cost prefers a monopoly price lower than the one

with the higher marginal cost
...
For example, small firms within a given industry often have more
incentive to defect from cooperative pricing than larger firms
...

• Another reason, also related to the revenue destruction effect, is that large
firms often have weak incentives to punish a smaller price cutter and will
instead offer a price umbrella under which the smaller firm can sustain its
lower price
...

Price Sensitivity of Buyers and the Sustainability of Cooperative Pricing
A final factor affecting the sustainability of cooperative pricing is the price
sensitivity of buyers
...
Under these circumstances, a firm may be tempted to cut price even if
it expects that competitors will eventually match the price cut
...


Condition for sustainable cooperative pricing

N = Number of firms, Piem= Monopoly profit for the industry, i = Discount rate
Pie0 = Prevailing profit for the industry

Lecture 8
Price Discrimination and Monopoly: Linear Pricing
Charging different prices to different consumers for the same good is referred to
as price discrimination
...

Feasibility of price Discrimination
A firm with market power faces a downward sloping demand curve, so if the firm
charges the same price to each consumer-the standard case of non-discriminatory
pricing-the revenue it gets from selling an additional unit of output is less than the
price charged
...

If the monopolist price discriminates, the firm can earn considerably more profit
...
Price discrimination can
sometimes make a monopolized market more efficient
...

The first of these is identifying who is who on the demand curve
...

In considering the identification problem, it is useful to recall a common
assumption that the monopolist has somehow learned what is the quantity
demanded at each price
...
The firm's
demand curve is then an explicit ordering of consumers by their reservation pricesthe top price each is willing to pay
...

Even when a monopolist can solve the identification problem, there is still a second
obstacle to price discrimination, arbitrage
...

Techniques: first-degree, second-degree, and third-degree price discrimination
...

Third-degree price discrimination or group pricing
Three key features:
• First, there is some easily observable characteristic such as age, income,
geographic location, or education status by which the monopolist can group
consumers in terms of their willingness to pay for its product
...

• Finally, third-degree price discrimination requires that the monopolist
quotes the same price per unit to all consumers within a particular group and
consumers in each group then decide how much to purchase at their quoted

price
...
This type of pricing policy is referred to as linear pricing
...
g
...

Consumers for whom the elasticity of demand is low should be charged a higher
price than consumers for whom the elasticity of demand is relatively high
...
Marginal revenue must be equalized in each market
...
Marginal revenue must equal marginal cost, where marginal cost is measured at
the aggregate output level
...


Product variety:
Firms sell different varieties of the same good-distinguished by color, or material,
or design
...


Price discrimination should be defined as implying that two varieties of a

commodity are sold [by the same seller] to two buyers at different net prices, the
net price being the price (paid by the buyer) corrected for the cost associated with
the product differentiation
...
For simplicity, we assume that this arbitrage, or self-selection problem
does not arise
...
Vacationers, by contrast, have a low
reservation price, denoted as VV
...
Since holiday travelers do not
mind staying away seven days, and since the ticket price does not exceed their
reservation price, they will willingly purchase this ticket
...

Second, the airline should set a price as close to VB as possible for flights with no
minimum stay
...
Business people
wanting to return quickly will gladly pay a premium over the one-week price VV up
to the value of M, so long as their total fare is less than VB
...
) Using such a scheme enables the airline to extract considerable
surplus from business customers, while simultaneously extracting the entire
surplus from vacationers
...

VERSIONING, BUNDLING, AND OTHER FORMS OF CONSUMER SORTING
Third-degree price discrimination: when different prices are charged to different
groups of consumers
...
g
...
These
examples have one thing in common: the seller can identify the

group to which each consumer belongs (in which country he or she lives, whether
or not he or she is a student, and so forth) based on some observable external
characteristic
...
For example, airlines know that people fly for business or for
leisure, and that the willingness to pay is higher among business travelers
...

Even if direct identification of each consumer's group is impossible, the seller can
still attempt to indirectly sort consumers by group
...
g
...
Because these fares imply a number
of restrictions-for example, a Saturday night stay in the place of destinationbusiness travelers are unlikely to purchase such fares
...

Versioning
By offering a number of "packages" of price and quality level, the seller is able to
sort consumers according to their willingness to pay
...
g
...

One extreme form of versioning occurs when firms reduce the quality of some of
their existing products in order to price-discriminate, that is, firms produce
damaged goods
...

Another example is provided by student versions of software packages
...
Price differences can be
justified only by price discrimination
...

Mixed bundling - buyers are offered the choice between purchasing the bundle or
one of the separate parts (photocopier and after-sales service bundle or buy
separately)
...
By contrast, the
decision to buy a durable good is one in which timing is of the essence
...

Because even high-valuation buyers prefer to pay low prices, the outcome of the
high-price-today- and-low-price-tomorrow strategy may turn out to be that most
buyers prefer to wait for the future low price
...
" One is to commit to not lower price in the future
...




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