Chapter 11: Q2. (page 449)
If the demand for drive-in movies is more elastic for couples than for single individuals, it will be optimal for theaters to charge one admission fee for the driver of the car and an extra fee for passengers. True or false? Explain.
The statement is true.
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Your firm produces two products, the demands for which are independent. Both products are produced at zero marginal cost. You face four consumers (or groups of consumers) with the following reservation prices:
CONSUMER GOOD 1(\() GOOD 2(\)) |
A 25 100 |
B 40 80 |
C 80 40 |
D 100 25 |
a. Consider three alternative pricing strategies: (i) selling the goods separately; (ii) pure bundling; (iii) mixed bundling. For each strategy, determine the optimal prices to be charged and the resulting profits. Which strategy would be best?
b. Now suppose that the production of each good entails a marginal cost of $30. How does this information change your answers to (a)? Why is the optimal strategy now different?
You are an executive for Super Computer, Inc. (SC), which rents out supercomputers. SC receives a fixed rental payment per time period in exchange for the right to unlimited computing at a rate of P cents per second. SC has two types of potential customers of equal number—10 businesses and 10 academic institutions. Each business customer has the demand function Q = 10 - P, where Q is in millions of seconds per month; each academic institution has the demand Q = 8 - P. The marginal cost to SC of additional computing is 2 cents per second, regardless of volume.
Some years ago, an article appeared in the New York Times about IBM’s pricing policy. The previous day,IBM had announced major price cuts on most of itssmall and medium-sized computers. The article said:
IBM probably has no choice but to cut prices periodicallyto get its customers to purchase moreand lease less. If they succeed, this could makelife more difficult for IBM’s major competitors.Outright purchases of computers are needed for ever larger IBM revenues and profits, says Morgan Stanley’s Ulric Weil in his new book, InformationSystems in the 80’s. Mr. Weil declares that IBM cannot revert to an emphasis on leasing.
a. Provide a brief but clear argument in support of the claim that IBM should try “to get its customers to purchase more and lease less.”
b. Provide a brief but clear argument against this claim.
c. What factors determine whether leasing or selling is preferable for a company like IBM? Explain briefly.
As the owner of the only tennis club in an isolated wealthy community, you must decide on membership dues and fees for court time. There are two types of tennis players. “Serious” players have demand
Q1 - 10 - P
where Q1 is court hours per week and P is the fee per hour for each individual player. There are also “occasional” players with demand
Q2 = 4 - 0.25P
Assume that there are 1000 players of each type. Because you have plenty of courts, the marginal cost of court time is zero. You have fixed costs of $10,000 per week. Serious and occasional players look alike, so you must charge them the same prices.
Many retail video stores offer two alternative plans for renting films:
• A two-part tariff: Pay an annual membership fee (e.g., \(40) and then pay a small fee for the daily rental of each film (e.g., \)2 per film per day).
• A straight rental fee: Pay no membership fee, but pay a higher daily rental fee (e.g., $4 per film per day).
What is the logic behind the two-part tariff in this case? Why offer the customer a choice of two plans rather than simply a two-part tariff?
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