Reference no: EM132090274

Economics Assignment -

Tesla's Damaged Goods Problem.

Consider Teslas business strategy on Model X cars. The Tesla Model X is a mid-sized, all-electric, crossover SUV. In this exercise, we focus on the pricing strategy of two models: Model X 75D and Model X 60D. Both models were launched by Tesla in 2015. The Model X 75D is equipped with a 75 kWh battery which gives the car a theoretical driving range of 417 km. While the Model X 60D shares exactly the same performing figures as X 75D and is also equipped with a 75 kWh battery, a software is installed to limit the maximum usage of battery to only 60 kWh, which gives the car a theoretical driving range of 360 km. Suppose there are 500 potential Model X buyers in Australia each year. Tesla conducts a comprehensive market analysis and divides the potential buyers into two groups: high-type buyers and low-type buyers. Each type's willingness to pay (in AUD) is

	High type	Low type
X75D	$150 000	$125 000
X60D	$130 000	$120 000

Suppose there are 200 high-type buyers and 300 low-type buyers. We further assume that the marginal cost of production for both models is the same at $100,000. However, Model X 60D incurs an additional software installation cost of $1,000. Suppose there is no fixed costs (this assumption won't affect our analysis below).

Tesla has the following three options:

Option 1. Launch only Model X 75D

Option 2. Launch only Model X 60D

Option 3. Launch both Model X 75D and Model X 60D

Questions

(a) Determine Tesla's optimal pricing strategy and profit under each option.

(b) Based on your answer in (a), which option should Tesla choose? Justify your answer.

(c) Many people may scratch their heads about why Tesla would like to intentionally (and costly) "damage" its own vehicles by limiting the capacity of 75 kWh battery to only 60 kWh? Why not just produce and sell Model X 75D as the quality is higher and the production cost is lower? For example, one consumer made the following point: "That makes no sense (to produce both models). If they have the same battery, it costs Tesla just as much to produce the 60kWh cars as the 75 kWh cars. Unless the demand curve is very flat, they should be able to sell more cars at the 60 kWh price point, and the increased volume ought to compensate for the lower price point."

Based on your answers in (a) and (b), comment on the above statement.

(d) Assume now there are x high-type buyers and 500- x low-type buyers, where x can be any number from 0 to 500. Determine Tesla's optimal product launch and pricing strategies based on the value of x.