Question #1: What are the optimal prices and which versions should be offered if Cambridge Software Corporation (CSC) can perfectly price discriminate?
Perfect price discrimination allows the firm to charge different prices for each market segment to the point where consumers pay their maximum WTP. We need to maximize profits from each market segment. Setting aside segment development cost, which is a fixed cost regardless of which version(s) chosen, we calculated how much profit the firm can make from each market segment when choosing different versions to produce. As shown in the table below, we found that the company can make the most profit from each market segment if they choose to product the “Industrial” version. Therefore, the Industrial version should be the only version to produce, and the firm’s optimal price to charge is the WTP per unit of the industrial version of each market segment.
Market Segment Version Size WTP Var Cost Estimated product completion cost Profit (Seg Dev Cost included)
Large corporation Student 5000 150 15 100000 575000
Commercial 5000 1200 25 200000 5675000
Industrial 5000 2500 35 500000 11825000
Corporate R&D Student 2000 100 15 100000 70000
Commercial 2000 1000 25 200000 1750000
Industrial 2000 2000 35 500000 3430000
Consultants Student 20000 200 15 100000 3600000
Commercial 20000 300 25 200000 5300000
Industrial 20000 600 35 500000 10800000
Small Businesses Student 15000 175 15 100000 2300000
Commercial 15000 225 25 200000 2800000
Industrial 15000 300 35 500000 3475000
Students Student 500000 50 15 100000 17400000
Commercial 500000 60 25 200000 17300000
Industrial 500000 100 35 500000 32000000
Question #2: If CSC offers only one version of Modeler, which version should it offer? And at what price?
Market Segments
1 Large Multidivisional Corporations
2 Corporate R&D and university Laboratories
3 Consultants and professional Companies
4 Small businesses
5 Students
Student Version Only
Price Segments that Purchase Unit Cost Unit Contribution Seg Dev Cost Demand Total contribution
$200 3 $15 $200-$15 = $185 $200K 20K (20K*(185))- 200K – 100K =$3.4 MIL
$175 3,4 $15 $175 - $15 = $160 $400K 35K (35K*(160))-400K – 100K = $5.1 MIL
$150 3,4,1 $15 $150-$15 = $135 $550K 40K (40K*(135)) – 550K – 100K= $4.75 MIL
$100 3,4,1,2 $15 $100 - $15 = $85 $650K 42K (42K*(85))-650K – 100K = $2.82 MIL
$50 3,4,1,2,5 $15 $50- $15 = $35 $950K 542K (42K*(35)) + (500K*(15))-950K – 100K = $7.92 MIL
Commercial Version (Following Same Intuition as Above)
Price Segments that Purchase Unit Cost Unit Contribution Seg Dev Cost Demand Total contribution
$1200 1 $25 $1200 - $25 = $1175 $150K 5K $5.725 MIL – 200K = 5.525MIL
$1000 1,2 $25 $1000 - $25 = $975 $250K 7K $6.575 MIL – 200K = 6.375 MIL
$300 1,2,3 $25 $300 - $25 = $275 $450K 27K $6.976 MIL – 200K = 6.776 MIL
$225 1,2,3,4 $25 $225 - $25 = $200 $650K 42K $7.750