AEM 4160: Strategic Pricing HW2 – Due at the beginning of the class Tuesday, February 15. Work in groups of 3 students. Submit one write-up per group. Write legibly, type when you can. Include a title page, listing the homework number and the names of your team members. Submit PART I and PART II on paper (either typed (preferred) or handwritten), and email PART III to your TA (Yiwei Wang; firstname.lastname@example.org) PART I 1. Price Discrimination 1. When pricing automobiles, American car companies typically charge a much higher percentage mark-up over cost for “luxury operation” items such as leather trim, etc., than for the car itself or for more “basic” options such as power steering and automatic transmission. Explain why. 2. Sal’s satellite company broadcasts TV to subscribers in Los Angeles and New York. The demand and marginal revenue are below. The TC of providing Q units of service is given by TC = 1000 + 30Q. What are the profit maximizing prices and quantities for the New York and Los Angeles markets? What would happen if people in LA were able to receive Sal’s NY broadcasts and vice versa due to a new improved satellite? PNY = 150 - 3QNY PLA = 120 – 3/2QLA 3. Many retail video stores offer two alternative plans for renting films: • Two-Part Tariff: pay an annual membership fee (e.g. $40) and then pay a small fee per film rented (e.g. $2 per film per day) • Straight rental fee: pay no membership fee but pay a higher daily rental fee (e.g. $4 per film). Why do you think the store might offer the two-part tariff? Why offer customers a choice rather than merely offering the two-part tariff? Give examples of other businesses/industries that adopt similar pricing strategies. PART II Answer the following questions about the HBS case ”Keurig at Home” by Eric T. Anderson. Be concise and use your own wording for your analysis. When you can, use the numbers provided in the case (e.g. the size of the gourmet coffee market, price and cost information – there is considerable amount of data in the case!) to answer the questions. Qualitative, well reasoned answers will be accepted, but some quantitative answers are preferred. 1) Should Keurig use a single K-Cup for all markets or should it launch the Keurig Cup in the at-home market and continue to the K-cup in the commercial market? 2) What price for a brewer and for the portion pack (K-cup/Keurig-Cup) do you recommend? Under your pricing strategy, how profitable are coffee sales for Keurig? How do coffee profits affect the brewer price? PART III Write a blog post. Blog assignment guidelines: http://courses.cit.cornell.edu/jl2545/4160/blogguide4160.htm Potential topics of choice for this HW assignment: 1) 2) 3) 4) 5) 6) First Degree Price Discrimination Reverse (Dutch) auction All the varieties of Second degree price discrimination Third degree price discrimination Two-Part Tariff In case you are unsure if your selected topic fits, email me and we will discuss! Submit your blog post in a Word file. If your blog story has a link to a video file, your TA will embed it, just indicate the link. In case there is a link to a website, put a footnote with the web address behind the word that you want to be hyperlinked. Try not to use media files that cannot be linked to. See the blogging guide for more details and guidelines.