Question

A manufacturer of microwaves has discovered that male shoppers, on average, have lower values for microwave ovens than female shoppers. Additionally, male shoppers attribute almost no extra value to an auto-defrost feature, while female shoppers, on average, value the auto-defrost feature. The manufacturer has determined that men value a simple microwave at $70 and one with auto-defrost at $80, while women value a simple microwave at $80 and one with auto-defrost at $150. If there is an equal number of men and women, what pricing strategy will yield the greatest revenue?

Answer 1

A person will buy the oven as long as the price of the oven is less than or equal to the valuation of the oven. The valuation is summarised in the table below:

	Simple microwave	microwave with auto-defrost
Male	70	80
Female	80	150

Supose there are "n" males and females. If there are equal number of men and women, then it is better to charge $70 for simple microwave and sell to both male and female (2n) as compared to charging $80 and selling just to the females (n). Revenue from price a price of $70 = 2n*70 = 140n

Revenue from price a price of $80 = n*80 = 80n

More revenue is generated when the price of simple oven is $70. It is better to charge $70 for oven.

In case of auto-defrost oven, it is better to charge $80 and sell to both. Total revenue in this case = 2n*80 = 160n

If they are charged $150 for auto-defrost oven, then only females buy, so total revenue in this case = n*150 =150n

It is better to charge $80 for the auto-defrost oven.

If women are the bulk of microwave shoppers, then the price should be set equal to the valuation of women. So, price of normal microwave should be $80 and for auto-defrost should be $150.