PROBLEM SESSION #6
1) True or False and Why? Strictly speaking if customers A and B pay a different price for
the same product then the firm is practicing price discrimination and absorbing
consumer surplus. ((2 lines).
2) Heard on the first floor of our building: “In my MBA class we are now covering price
discrimination and other pricing strategies. I admit that I am not paying too much
attention, just enough to get a C, ha-ha. I didn’t pay attention to regression analysis and
forecasting demand too. The reason is straight forward. Our firm works with a
competent group of consultants. They do this for us. We pay them well for their
services. I don’t know exactly what they do and it is difficult to understand all they say,
but I just do what they say. That solves the problem for me. Recently, I heard one of
them remarked that randomized pricing may lead to higher average prices in a store. It
is impossible. I know that randomized pricing increases the search cost for customers
and may also keep competitors guessing and they may not be able to match our prices
rapidly but it will not increase the average price.” Do you agree with the MBA student
or the consultant? Explain (5 lines)
3)
At Superstore, bags with both small and large potatoes bundled together at random
cost relatively less than bags with large potatoes (both bags weigh the same). Offer an
explanation as to why. (5 lines)
4)
True or false and why? A firm that practices third degree price discrimination will charge
different prices depending on the strength of demand. (2 lines)
5)
An auto dealer in Chicago recently told his mother that he makes no money on the sales
of his cars but the markup on the needed car accessories is 200 percent. Can this
possibly be a profit-maximizing strategy? Explain. (5 lines)
6)
If the government imposes a price control on product x, what pricing policy would you
use to circumvent the price control, even when your firm is required to invoice x at the
controlled price? (5 lines)
7)
You manage a supermarket owned by Star Express. Your parent firm owns a chain of
supermarkets. You observe different prices for some products in the supermarkets
owned by the firm. For example, while your supermarket charges $1 for bubble gum,
another supermarket in the chn charges $1.20 for the same bubble gum. You also
observe that supermarkets in the chain do not necessarily have the same layout.
There’s no reason to believe that the costs of serving customers are different. Provide
an explanation for what is going on here. Is this price discrimination? (5 lines)
8)
How can second degree price discrimination allow for customer ‘self-sorting”? (4 lines)
9)
Toyota produces both Toyota and Lexus cars. The average price and profit on a Lexus is
higher than the average price and profit on a Toyota. Does this mean Toyota should
produce more Lexus cars and less Toyota cars? Why (5 lines)
BONUS QUESTION
10)
You are a pricing analyst for a company that recently spent $10,000 to develop
statistical software package. To date, you only have one client. A recent internal study
revealed that this client’s demand for your software is Q= 100 – 0.1P and that it will cost
you $500 per unit to install and maintain software at this client’s site. The CEO of your
company recently asked you to construct a report that compares (1) the profit that
results from charging this client a single per-unit price with (2) the profit that results
from charging $900 for the first 10 units and $700 for each additional unit of software
purchased. Construct this report, including in it a recommendation that would result in
even higher profits.