Assume you own a movie theater in a small town and you have no other competition. Given that you observe much greater demand on the weekends than weekdays you think charging a differential price might be a good strategy. You therefore conducted a study that has revealed two different demand curves at your movie theater. On weekends, the inverse demand function is P=15 – 0.001Q; on weekdays, it is P=10-0.001Q. You acquire the legal rights from movie producers to show their film at a cost of $15,000 per movie, plus a $2 “royalty” for each moviegoer entering your theater (the average moviegoer in your area only watches a movie once). Given this information, devise a pricing strategy to maximize your firm’s profits. What price(s) would you charge?
Jet.com is a Hoboken, NJ based start-up that calls itself the ‘...online version of Costco”. Prior to starting their site in July, Jet had raised $225 million in capital from investors including Goldman Sachs Group Inc. and Google Ventures. Jet’s initial pricing strategy was to charge an annual membership fee of $50 and then keep prices low by subsidizing them with the sales commissions it collected from the site’s merchants. Jet insisted that their sole source of profits were to be this annual fee. Below is a comparison between Jet and Amazon. Jet announced that they were abolishing this annual fee. Given what we know about Costco and their success with this type of pricing, why might Jet have abandoned this model? (Think about this question without regard to Jet’s acquisition by Walmart, it is not relevant to the question being asked.)
Apple outsources production of iPhones, iPads and other electronic devices to Taiwanese contract manufacturer, Foxconn, with 800,000 workers at factories in Shenzhen, Chengdu, and other locations in China. Faced with increased competition for labor, Foxconn has raised wages and increased benefits for its workers. In April 2012, Samsung sued Apple for violating various Samsung patents to produce mobile phones.
a) Using a suitable diagram, explain how Apple should adjust its production and price if Foxconn raises its prices for contract manufacturing?
b) Suppose that Apple must pay Samsung a royalty on each mobile device that it produces. How should Apple adjust its production and price in response to the royalty?
c) How would you change your answer in (b) if Apple must pay a lump sum in damages rather than a royalty per unit produced?
MichiganSux Computers is a manufacturer of customized computers that meet the specifications required by a local university. Over 90 percent of their clientele consists of college students. MichiganSux Computers is not the only firm that builds computers to meet this university’s specifications; indeed, it competes with many manufacturers online and through traditional retail outlets.To attract its large student clientele, MichiganSux Computers runs a weekly ad in the student paper advertising its “free service after the sale” policy in an attempt to differentiate itself from the competition. The weekly demand for computers produced by MichiganSux is given by Q = 1000 – P, and its weekly cost of producing computers is TC = 2,000 + Q2. If other firms in the industry sell PCs at $600, what price and quantity of computers should MichiganSux produce to maximize profits? What long-run adjustments should be anticipated? Explain?
Recent times have seen several industries move away from bundled products (e.g., airlines and hotels). In two separate lectures (Demand and Sophisticated Pricing) the idea of the bundle was discussed. Simply, we considered examples (e.g., Disney) where it was more profitable to bundle versus selling the various products a la carte. A move away from bundling must suggest that ΠBundle < Πal a carte, that it is less profitable to bundle. Why might this be the case? That is, what does it suggest that firms do not know? (Note: Π is used to denote ‘economic profits’.)
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For weekends the inverse demand function is as
P= 15-0.001 Q
TR = P*Q = 15Q – 0.001Q2
MR = 15 – 0.002 Q
TC = 15000+ 2Q
MC = 2
For weekends, the profit maximizing price should be at where MR= MC
15-0.002Q = 2
Price should be at P=15-0.001 (6500) = 15-6.5=$8.5
For weekdays the inverse demand function is as
P = 10-0.001Q
MR = 10-0.002Q
MC = 2...