of the day (being higher in the evening than in the morning), but prices of menu items remain the same and are very low for Moscow standards.

For instance, a portion of pasta costs only about $2–2.5, the price of a ribeye steak is about $4, a burger with grilled tiger prawns and arugula can be purchased for merely $3. For only $3–4 a customer can drink a glass of decent wine. These prices are very low compared to other restaurants in the city. Customers must eat and drink inside; if they want to take something away, the price doubles.

a) (15 rp) One of the well-known models of price discrimination explains how similar pricing scheme can be profitable for a seller (for instance, in Disneyland entrance fee is high while using most of its facilities is free). Using this model, explain, how such pricing technique helps this restaurant maximize profits (use graphical analysis where appropriate).

4c:T593,

Two things are important here:

1. Different entry fees for different times of the day. This works because in the evening and at night people are ready to pay more in restaurants. This is because they most likely want to have a fancy dinner with vine etc. rather than a small breakfast that they can otherwise (if prices are high) cook at home. Similar things are sometimes called a third-degree price discrimination.

2. Entry fee by itself. This pricing is sometimes called two-part tariff (second-degree price discrimination) and the logic behind it is as follows. If the restaurant use a simple linear price (that is, some fixed amount per meal without any other fees), he has a dilemma. If the price is way higher than marginal cost, profit per meal will be high, but the restaurant will undersell, thus leaving some potential profit unreceived. On the other hand, low linear prices close to the marginal cost will allow to sell many meals, but each meal will bring little profit, leaving the surplus to the customers.

Two-part tariff is a solution: thus the restaurant