Question

Assume that you manage a firm that sells calculators. You want to sell calculators to both commercial users and home users, and so you have developed 2 types of calculators - fancy and basic calculators. Each customer type has the following valuations for each type of calculator:

	Home User	Commercial User
Fancy Calculator	$100	$200
Basic Calculator	$30	$50

If you have an 100 home users and 100 commercial users that at most will buy 1 calculator each, how much additional revenue does your firm generate by using the indirect price discrimination strategy described in (5) compared to just selling the fancy calculator to all users at a price of $100 and discontinuing the basic calculator? (Write answer without the dollar sign.)

Answer 1

In indirect price discrimination,firm offers a menu of different choices and allows the consumer what to buy.

So firm knows each consumer only buy one calculator and their willingness to pay for each type.

It will charge for fancy calculator=180

For basic calculator=30

Total revenue=100*180+100*30=21,000

Total revenue without price discrimination=100*200=20,000

Additional revenue generated due to pric discrimination=21,000-20,000=1000