Question

1. 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 -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.
   1. If you were able to identify which segment a given consumer is from, what would be the optimal pricing strategy?

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

We know that optimal price(P) is case of monopoly is given by

Where

price elasticity of demand

MC=Marginal Cost

a)

If consumers can be identified, optimal price in case of segment where price elasticity is -5 is given by

If consumers can be identified, optimal price in case of segment where price elasticity is -2 is given by

Optimal price strategy is

a) Charge a price of $10 to the customers with price elasticity of demand equal to -2 and

b) Charge a price of $6.25 to the customers with price elasticity of demand equal to -5 and

Price difference=10-6.25=$3.75

Minimum number of high value customers needed to make the investment economical=Cost of device/Price difference=1000/3.75=266.67 or say 267.