Question

Suppose that your team has been hired by a high-tech, consumer electronics firm to provide an economic analysis of how to price this new product in such a way that maximizes the company's profits. In today's technologically driven world, there are some people who enjoy becoming the first adopters of a new product. Most people, however, seem to hold back to see the development of the product before they jump in.

Are there any strategies that the firm can take so that they can fully use the knowledge of the relative elasticities? As a result, you will need to investigate what market separation is. Is there any way that we can use market separation on the two markets and increase revenues? In these sorts of markets, we might also see lagged demand and network effects. What sort of pricing strategies do firms have to follow when these conditions are present?

Answer 1

Yes. the firm can take up strategies o that they can fully use the knowledge of the relative elasticities. The pricing strategy best suited for such a market is Peak Load Pricing. The consumers who are first adopters of a new product have a demand curve which is relatively less elastic as compared to the demand curve of the consumers who hold back to see the development of the product before they jump in. The consumers who have a less elastic demand can be charged a high price as compared to the consumers who have a more elastic demand of the product.

Market separation in the market can help to increase revenue of the product. Market separation can be done by using the strategy of Peak Load Pricing mentioned in the paragraph above. Separating markets by charging different prices to each set of consumers will help in increasing demand.

Lagged demand helps in formulating the elasticities of demand of the two consumers.This will help in setting prices in two types of markets. In case of network effects, the demand of the product increases as more and more people have more of the product. Thus, initially less price of the product can be charged and one the demand of the product increases because of network effect, the price of the product can be increased. Thus, different strategies are used in different cases.