Question

As you know we are the only gourmet nut producer in the south. We are known not only for the quality of our nuts, but also for our unique seasonings.

Right now we are charging a price of $5 per bag for all of our nuts, no matter which brand is more popular. This includes our cinnamon-cayenne roasted almonds, maple-chipotle roasted pecans, and honey-mesquite roasted cashews.

However, we feel that our generic approach to pricing is un-optimal and outdated given the difference in demand for each nut.

Our sales analytics team has supplied us with the following estimates of demand for our different nuts: (Almonds-A, Pecans-P, and Cashews-C)

Q_A = 1,200 – 150P_A

Q_P = 3,000 – 100P_P

Q_C = 2,400 – 200P_C

The sales department has also informed us that our costs are constant across the different nuts at $2 per bag.

Please review our current pricing strategy and let us know if we have anyway of customizing prices across the different nuts. Ultimately we are after ways of increasing our profits, so that is objective number one.

Answer 1

The above question shows that the demand functions of different types of nut producers is different and charging a uniform price for all three types of nuts is not an optimal strategy. The company will not maximize its profit by charging uniform prices. On the other hand, if the firm uses third degree price discrimination and chagres different prices of three nuts based on their demand functions then the firm will maximize its profits. The third degree price discrimination states the firm should charge different prices in different markets to maximize profits.

Thus, the above pricing strategy is not optimal for profit maximization and different prices should be charged in different markets for profit maximization based on the demand functions in different markets.