Question

Frank's Tanks and Fine Rides

Frank's Tanks and Fine Rides (FTFR) is considering the way it approaches the market. First, it can sell cars by posting a “always low (fixed) or uniform price. Customers who are willing to buy simply complete paperwork and the sale is complete.

Alternatively, FTFR can hire commissioned sales reps to probe customers willingness and ability to pay. These reps receive training to chat-up the customers in order to find out where they live and work. (a proxy for ability to pay) Often they simply ask them what they intend to spend!   

Under the uniform pricing strategy, the firm's MC is $2 (thousand) per unit (which is also the AVC). The non-uniform strategy increases costs (MC and AVC increase by $1 thousand per car (to $3) ). The firm incurs FC of $6K per month either way. Assume each customer pays their full reservation price.

With a demand curve of P = 10 - Q, which strategy should Frank's use and why?

Answer 1