Question

A firm that supplies maintenance on photocopiers can provide 2 versions of the service: Elite (E) and Regular (R). The marginal cost of each version is identical and for simplicity, we set it equal to 0.

There are two equally-sized buyer segments, A and B, with reservation prices for the 2 versions given by the table below:

	Elite	Regular
Segment A	$80	$55
Segment B	$30	$25

(Note: if a buyer is indifferent between buying the 2 versions, assume he or she buys the Elite)

Which of the following pricing strategies would maximize the firm's Revenue?

Group of answer choices

Sell the Elite version at $80 and the Regular version at $25

Sell the Elite version at $50 and the Regular version at $25

Sell only the Regular version at $25

Sell only the Elite version at $80

Answer 1

There are two versions and two segments. It is assumed that the consumer is indifferent between two versions and buys elite, then

The seller should focus on the price of elite.

If he sells the Elite version at $30, then the revenue he would get from both the segments would be $30*2=$60.

Similarly whatever he fixes the price for regular, we know that the buyer is buying Elite.

So if the price of Elite is fixed at $80, only segment A would buy and still the revenue would be higher than the previous case of $60 ie it would be $80.

So profit would be maximised when the seller sells only Elite at $80.

Answer is option D) sells only elite at $80.

(you can comment for doubts)