Question

The publisher of an online newspaper knows that there are two types of customers. ‘students’ and ‘non-students’. Although they cannot distinguish what type of buyer is actually making a purchase of a subscription, they know the demand curves for each type of buyer. These are given by the following:

Students: p = 80 - q
Non students: p = 100 - q
where is q is the number of articles that are purchased. Assume that the marginal cost of supplying articles equals zero.
a. What is the maximum willingness to pay for 80 articles for the students?
b. What is the maximum willingness to pay for 80 articles for non students?
c. Assuming that buyers purchase the subscription that gives them the maximum consumer surplus, and they only purchase one subscription, what will student buyers and non-student buyers do if faced with the following choices:
Basic: 80 articles at $32 per month.
Premium: 100 articles at $50 per month
d. Assuming that buyers purchase the subscription that gives them the maximum consumer surplus, and they only purchase one subscription, what will student buyers and non-student buyers do if faced with the following choices:
Basic: 80 articles at $32 per month.
Premium: 100 articles at $35 per month

e. What is the highest price that can be charged for the premium version so that the non- students purchase this rather than the basic subscription, given the price of the basic is $32.

f. What is this pricing behaviour called?

Answer 1

I would like to answer the question in a general perspective in a simple manner by understanding the basic factors involved under the question for clear understanding so as to to find answers to the specific part of questions.

Basically we have to understand, there are two concepts of demand for a commodity, i.e. individual demand and market demand. Individual demand means the desire of an individual consumer for a commodity for which the consumer has ability to pay and willingness to pay for the commodity. Market demand for a commodity means to the sum of individual demands’ for the commodity.

Demand for a commodity arises because the use of the commodity gives utility to the consumer. Here utility means pleasure and satisfaction derived from a commodity.

There are two approaches to the measurability of utility. Those are cardinal utility approach and ordinal utility approach. Cardinal utility approach assumes that utility is measurable cardinally, i.e. in cardinal numbers. It can be measured in terms of money one is willing to pay for a unit of commodity under the assumption that Marginal Utility of money remains constant. This develops to the law of diminishing marginal utility, i.e. the utility derived from marginal unit consumed goes on diminishing. Here a consumer maximises utility from a commodity at the level of consumption at which price of the good is equal to the marginal utility. This rule applies to all goods. This rule gives the principle of equi-marginal utility.

Ordinal utility approach as stated above uses indifference curve (IC) as a tool of analysis. An IC shows different combinations of two substitute goods yielding the same level of utility. IC technique is used to derive the consumer demand curve. IC can be defined as locus of points each representing a different combination of two substitute goods, which yield the same utility or level of satisfaction to the consumer. So it be said IC is indifferent between any two combinations of two goods when it comes to making a choice between them. When such combinations are plotted graphically, it produces curve. This curve is called the indifference curve.

Law of demand says changes in price causes change in demand which is called price effect. IC curve technique has the merit of being used to measure the income effect and substitution effect on change in demand due to change in price.

Factors behind shifts in the demand curves are increase in consumer’s income, price of a commodity, advertisements by the producer of the commodity and price of a compliment,

A consumer attains his equilibrium when the consumer maximises his total utility, given his income and market prices of the goods and services that he consumes.

Pricing behaviour is a relatively new approach in the pricing of commodities. We can say, pricing for a product is determined based on the behavior of potential customers. The data on customer behavior form the basis for pricing, which involves psychological, emotional, and behavioral aspects of consumers.

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