Question

Sweet Sound Piano Company [SSP] would like to maximize its profit from selling pianos. However, some potential consumers are budget-conscious, and others not. Unfortunately, SSP cannot tell which is which. So, SSP produces a premium line of pianos that it markets under the Sweet Sound name, and a similar line of pianos under the Blissful Sound name. While the cost of producing these pianos is quite similar, all consumers agree that Sweet Sound are of higher quality than Blissful Sound pianos and would be willing to pay more for a Sweet Sound. Budget-conscious consumers feel that Blissful Sound pianos are worth $6,000, and Sweet Sound pianos are worth $8,000. Concert pianists believe that Blissful Sound pianos are worth $7,000 and Sweet Sound pianos are worth $12,000.

Suppose SSP prices its Blissful Sound pianos at $5,000 and its Sweet Sound pianos at $10,500. Are these prices incentive compatible? Please explain your answer.

Answer 1