Reference no: EM132897675
Spotify is a music company that sells music online. They provide unlimited access to their library of more than 2 million songs for a monthly fee of $50. Subscribers can play their songs on up to 5 registered computers or compatible portable devices, and they can burn 50 songs a month on CDs. We will call this the "high-end version" service.
Spotify is considering a new service (the "low-end version") where customers can play their songs only on two computers/devices and cannot burn any songs to a CD. Spotify's market research indicates that there are 3,000,000 potential Spotify customers that fall into three categories:
group A: 1,000,000 customers who are willing to pay $50 for the high-end, and $25 for the low-end version. group B: 1,000,000 customers who are willing to pay $30 for the high-end, and $20 for the low-end version. group C: 1,000,000 customers who are willing to pay $18 for the high-end, and $10 for the low-end version.
Spotify's incremental cost per customer is $10 per month, mainly in payments to the music copyright holders, and this cost is the same whether a customer signs up for the high-end or the low-end version of its service.
It turns out that group C consists of college students living in university dorms, and while Spotify cannot tell which customers belong to groups A or B, they can identify group C customers, e.g., because they have a university email account (.edu), and their computers are on university networks. This means that Spotify can offer one or both versions of its service to group C customers at prices different from the prices charged to groups A and B, without worrying about arbitrage or cannibalization. Given this information, Should Spotify offer one or both versions described above to group A, B and C, and if so, how should each version offered be priced? Show your supporting calculations.
Provide your answers on colored cells in Table 1 on worksheet "Problem 4". If you decide to not offer either High End or Low End version to one group, you can put "Not Available" on the cell indicating the price for that version.