Question

7. The market analytics team has identified that there are two distinct market segments for your product. One segment (A) has an own-price elasticity of -1.5; the other (B) has an own-price elasticity of -2.0. The marginal cost of production is $5 regardless which market you sell to. a. If you were able to identify which segment a given consumer is from, what would be the optimal pricing strategy? b. If you can’t tell consumers apart, you have to charge everyone the low price. For $1,000 you can buy a device that can detect consumer type before they purchase the product. How many “high value” customers would you need to make an investment in this consumer detection device?

Answer 1

a) Optimal pricing strategy for two different consumer types

PA = MC x (edA/edA + 1) and PB = MC x (edB/edB + 1)

PA = 5 * (-1.5/-0.5) and PB = 5 * (-2.0/-1.0)

PA = 15 and PB = 10

Hence, the firm should charge a price of 15 per unit from segment A and a price of 10 per unit from segment B

b) Profit should be increased by 1000 at least to cover the cost of devise. Profit per consumer from lower valued consumers is (10 - 5) = $5 while the profit per consumer from high valued consumers is (15 - 5) = $10, assuming MC = AC. Now to cover 1000, profits per high valued consumer should rise by $5 (10 - 5). This gives the minimum number of high valued consumers at 1000/5 = 200.

Thus, we need 200 “high value” customers would you need to make an investment in this consumer detection device.