Question

4.Suppose you are a pricing analyst for Data Corporation, a firm that recently developed a new software program for data analysis. You have two types of clients who use your product. Type A Inverse demand for your software is P = 120 –10Q,where Q represents users and P is in dollars per user.Type B’s inverse demand is P = 60 –2Q. Assume that your firm faces a constant marginal cost of$10 per user to install and setup this software for a Type A user and $20 per user to set up for a Type B user.

(a)Suppose you can tell which type of buyer is buying the product before a purchase is made. What kind of price discrimination will you practice in this case. Using marginal analysis, determine the price you will charge each type. What will be DataXX’s profit?

(b)However, suppose you were wrong in your assumption that you could correctly identify the buyer type. Instead it is possible that a Type A buyer can come in and pose as a Type B buyer and vice-versa and get a price you intended for the other type. What will be DataXX’s profit in this case?

(c)In the situation described in (b), describe the type of price discrimination that can still work. Explain how you could use a menu of two-part tariff to implement this price discrimination. In words, explain how you can ensure that the two types will end up paying different prices.(d)Assuming that you pick the per-unit price for one of the two-part tariffs as the same as that you obtained in (a) to be charged to the Type B buyers and that you pick the per-unit price for the other two-part tariff equal to $10, determine the fixed charges you would want to pick for the two-part tariffs. In your answer, describe which Type of consumer will you be targeting each of these two-part tariffs. What will be DataXX’s profit in this case?

Answer 1