Pricing Strategies for Firms with Market Power End of Chapter Problem

A local golf courses hired-gun econometrician has determined that there are two types of golfers, frequent and infrequent. Frequent golfers annual demand for rounds of golf is given by

=240.3Qf=240.3P

where P is the price of a round of golf. In contrast, infrequent golfers annual demand for rounds of golf is given by

=100.1Qi=100.1P

The marginal and average total cost of providing a round of golf is $20.

a. Suppose the golf course could tell a frequent golfer from an infrequent golfer. Calculate the following variables:

Q_f =

P_f = $

Profit_f = $

Q_i =

P_i = $

Profit_i = $

The golf course would thus generate

in total profit.

b. The greens manager has difficulty telling frequent from infrequent golfers, so she decides to use second-degree price discrimination (quantity discounts) to make different types of golfers self-select into the most profitable pricing scheme. The course sets a price for individual rounds of golf but also offers a quantity discount for members willing to buy a large quantity of rounds in advance. The courses owners hope that frequent golfers will self-select into the discounted plan and that infrequent golfers will choose to buy individual rounds.

What price (P_regular) should the golf course set for individual rounds of golf, and what price (P_discounted) should it set for the discounted plan?

P_regular = $

P_discounted = $

To maximize profit, the golf course should set a minimum quantity for the discounted plan of

rounds of golf.

c. Frequent golfers therefore

self-select the discounted plan.

d. Infrequent golfers therefore

self-select the discounted plan.

e. With the quantity discount plan, the owners earn just as much profit as they would if each type of golfer came to the course with the word "frequent" or "infrequent" tattooed on his or her forehead.

true

false