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Pricing of Multiple Products ¢ Products with Interrelated Demands ¢ Plant Capacity Utilization and Optimal Product Pricing ¢ Optimal Pricing of Joint Products : — Fixed Proportions | — Variable Proportions IL. Lo Pricing of Multiple Products Plant Capacity Utilization A multi-product firm using a single plant should produce quantities where the marginal revenue (MR;) from each of its k products is equal to the marginal cost (MC) of production. MR, = MR, =+=MR, =MC Pricing of Multiple Products Plant Capacity Utilization | Pricing of Multiple Products Joint Products in Variable Proportions | Price Discrimination Charging different prices for a product when the price differences are not justified by cost differences. Objective of the firm is to attain higher profits than would be available otherwise. First-Degree Price Discrimination ¢ Each unit is sold at the highest possible price ¢ Firm extracts all of the consumers’ surplus ¢ Firm maximizes total revenue and profit from any quantity sold \ = \ Second-Degree Price Discrimination ¢ Charging a uniform price per unit for a specific quantity, a lower price per unit for an additional quantity, and so on ¢ Firm extracts part, but not all, of the consumers’ surplus First- and Second-Degree Price Discrimination In the absence of price discrimination, a firm that charges $2 and sells 40 units will have total revenue equal to $80. Consumers will have consumers’ surplus equal to $80. First- and Second-Degree Price Discrimination If a firm that practices first-degree price discrimination charges $2 and sells 40 units, then total revenue will be equal to $160 and consumers’ surplus will be zero. Third-Degree Price Discrimination ¢ Charging different prices for the same product sold in different markets ¢ Firm maximizes profits by selling a quantity on each market such that the marginal revenue on each market is equal to the marginal cost of production Third-Degree Price Discrimination Q, = 120-10 P, or P, =12-0.1 Q, and MR, = 12-0.2Q, Q, = 120 - 20 P, or P, = 6 - 0.05 Q, and MR, =6-0.1Q, MR, =MC=2 MR, = MC =2 MR, =12-0.2Q,=2 MR, =6-0.1Q,=2 Q,=50 Q, = 40 P, =12-0.1 (50) =$7 P, = 6 - 0.05 (40) = $4 International Price Discrimination « Persistent Dumping « Predatory Dumping > — Temporary sale at or below cost — Designed to bankrupt competitors — Trade restrictions apply L ¢ Sporadic Dumping ae | — Occasional sale of surplus output Transfer Pricing ¢ Pricing of intermediate products sold by one division of a firm and purchased by another division of the same firm « Made necessary by decentralization and the creation of semiautonomous profit centers within firms 
