Question

Sling is a streaming television service that lets you watch live network TV (and local channels), including the ability to add “a la carte” channels so you don’t pay for channels you would never watch. It has three plans or options (though two are the same price even though Sling Orange has fewer channels and can only stream on one device at a time, and Sling Blue has more channels and can stream on three devices at one time) from $15 to $25 per month (though those may be introductory rates). From Sling’s perspective, the difference in the cost of service provision between each plan or option seems to be basically the same (it streams content to your device and automated software handles the different features between plans). How do you explain the different prices for virtually the same service, given that the cost to Sling of providing each plan is basically the same?

Select one:

a. Sling is making the common mistake of trying to maximize its profit margin instead of its total profit. Maximizing profit margin always results in a lower quantity supplied than maximizing total profit, and selling different plans will result in a lower quantity for each plan than if Sling sold a high quantity of a single service.

b. Price discrimination between demanders. High demanders are willing to pay a high price for a plan that includes more channels. Low demanders aren't, and are only willing to pay a low price for a relatively smaller number of channels.

c. Price discrimination between demanders. Buyers of the low-priced plan are high demanders since they are spreading out their demand for entertainment over fewer stations and options, so they value each single station or option relatively highly. Buyers of the more expensive plan are low demanders since they spread their entertainment demand over a large number of stations and options, and thus do not value each single station or option very highly.

d. The prices are different because it is more costly for Sling to set limits on what it allows to stream to individual devices under its $15 plan, and it is cheaper for Sling to just let all of its content stream under its $25 plan. The price difference is due to the cost difference.

Answer 1

Slings take advantage of price discrimination between demanders. High demanders are willing to pay a high price for a plan that includes more channels. Low demanders aren't, and are only willing to pay a low price for a relatively smaller number of channels.

Correct Ans - B