Question

3. The inverse demand for a product is P-50-0.10, and the MC to produce is $10. What is the best pricing strategy for this firm: charging all customers the same price, 2-part pricing, or block pricing?

Answer 1

The strategy that Produces the highest profit level will be preferred

So single price is monopoly price

At eqm, MR = MC

50-.2Q = 10

40 = .2Q

Q = 200, P* = 50-.1*200 = 30

π = (30-10)*200 = 20*200 = $ 4,000

When single price of $ 30 is charged

.

Two part pricing

Charge P = MC = 10

& A fixed fee = CS ( Consumer surplus ) when P = 10

So, from demand Curve

10 = 50-.1Q

.1Q = 50-10

Q* = 40/.1 = 400

Then CS = .5*(400)*(50-10)

= 200*40

= 8,000

So π = fixed fee = $ 8000

As P = MC , so profit comes from only fixed fee

.

Block pricing

At P = MC = 10, a package of 400 units is sold at

P = CS + total Production cost

= 8000 + 10*400

= 8000 + 4000

Price of optimal size of package = $ 12,000

Profit to producer = 12,000 - 4000

= $ 8000

(4000 is Production cost of 400 unit package )

Thus block pricing & 2 part pricing result in same profit , but higher than single price

So best pricing strategy could be 2 part or block pricing