Consider a firm with market power who wants to use a two-part pricing strategy (

Question

Consider a firm with market power who wants to use a two-part pricing strategy (T,P). There are N1 = 200 customers with demand P = 10 - Q1 and N2 = 300 with demand P = 15 - Q2 . The firm has zero fixed costs and constant marginal cost C = $4. –Hint: Recall that if P = a1 - Q1 and P = a2 - Q2 , with a2 > a1 , then the derivative of ( N1 + N2 )*T(P) + (P-c)*[ N1 *( a1 - P) + N2 *( a2 - P)] with respect to P, where T(P) = (a1 - P)2 / 2, is given by -( N1 + N2 )*( a1 - P) + N1 * ( a1 - P) + N2 *( a2 - P) - (P-c)*( N1 + N2 ). If the firm wants to sell to only one of the two groups, then

a) It will set T = $18 and obtain profits equal to $3,600

b) It will set T = $18 and P = $10

c) It will set T = $60.5 and obtain profits equal to $18,150

d) None of the above

Explanation / Answer

It will set T=$18. And obtain profit equal to 3600

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