You are the branch manager given the objective to maximize revenues by pricing a

Question

You are the branch manager given the objective to maximize revenues by pricing a new stereo system composed of a reciever, CD player, and speakers. Your economists have estimated that two diffeernt groups will purchase these products: students and club owners. The economists' analysis indicates that the total maket for its brand of stereos consists of 10 students and 5 club owners. In addtition, it is estimated that the maximum amount each group will pay for each steo component is as follows:

Groups Receivers CD Player Speakers Bundle

students$250 $150 $100 ?

club owners $200 $75 $250 ?

(a) In the standard pricing strategy, what price should you charge for each item seperately? How much revenue do you earn from each item? How much revenue do you earn in total? Show work.

(b) How much is your revenue under perfect price discrimination? Show work.

(c) Fill out the rest of the table. When bundling the components and charging one price for the bundle, what price should you charge to maximize revenues? How much will you earn? Show work.

(d) Which strategy do you choose if both are possible for you?

(e) What might prevent first-degree price discrimination?

(f) How much are you willing to spend to be able to implement first-degree price discrimination? Show work, explain briefly.

Explanation / Answer

Price receivers at $200, CD players at $75, and speakers at $250. Revenues from receiver sales will thus be $200(60,000) = $12 million, revenues from CD player sales will be $75(0,000) = $4.5 million, and speaker sales will be $250(50,000) = $12.5 million b. Charge each group the maximum price they will pay for each item. Students will pay $250, $150, and $100 for a receiver, CD player, and Speakers, respectively. Club owners will pay $200, $75, and $250, respectively. Total revenues from this strategy are: $5 million + $26.25 million = $31.25 million c. Using a commodity bundling strategy, JVC would maximize revenues when it charges $500 for a bundle containing all three components. Its revenue would be $30 million (60,000 x $500). d. use commodity bundling e. If the market (of students and club owners) is not segmented enough, or a buyer (in this case, the student) decides to resell their product, specifically to the club owners, first-degree price discrimination may not occure.

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