ABSTRACT
This chapter develops the foundations for pricing a product based on elasticities. It reviews the basic market structures reader may have to consider when doing their analyses. The chapter presents material on classic profit maximization for different market situations. It discusses pricing and market power, a concept often used in antitrust cases but that has wider applicability. The chapter emphasizes the importance of elasticities. It discusses a more realistic market structure involving a dominant firm. The chapter reviews the major form of pricing structure practiced by firms with some degree of market power: price discrimination. The monopolist has the ability to set price, but it is limited by the downward-sloping demand curve. The monopolist is myopic because it fails to consider the lifetime value (LTV) of a customer and the cost of acquiring and holding that customer. The chapter highlights the forms of discrimination and the role of elasticities in one of the forms.
