Reference no: EM13880865

The accompanying spreadsheet depicts the pricing options (cells C10 and C18) for a best seller that is released in hardback and as an e-book. The demand curve for the hardback version is described by the equation: Q = 80 - 2.4P + 2PE, where PE denotes the e-book price. In turn, the demand curve for the e-book is given by: QE = 80 - 4PE. (Both quantities are denominated in thousands of units.) Note that lowering the e-book price by $1.00 increases e-book sales by 4 thousand units but also reduces hardbook sales by 2 thousand books. In short, each additional e-book sold replaces .5 hardback sales.

The profit cells are calculated based on the economic facts noted earlier in the chapter. (1) Revenues for the e-book are split 70-30 between book publisher and online seller. The marginal cost of producing and delivering additional e-books is essentially zero. (2) Revenues for the print book are split 50-50 between the book publisher and the book retailer. The publisher incurs $3.50 per hardback in production and related costs. (3) For both book types, the publisher pays a 15 percent author royalty based on total retail revenue.

a. Re-create the spreadsheet shown. If e-books did not exist (set PE = $20 so that QE is 0), what is the publisher's profit-maximizing hardback price?

b. Before 2010 when Amazon was free to set the e-book price, what price should Amazon have set? In response, what is the publisher's profit- maximizing price for the hardback?

c. Alternatively, if the publisher sets both book prices, what are the optimal prices? Why does the publisher prefer a higher e-book price than the online seller?

d. Suppose that each e-book sale replaces one hardback sale. This cannibalization rate is described by the hardback demand curve:
Q = 40 - 2.4P + 4PE. Using this demand curve, re-answer the questions in parts (b) and (c). Confirm that this worsens the pricing

 

	A	B	C	D	E	F	G	H	I
1
2		Pricing Print Books and E-books
3
4
5		Book Publisher		Q = 80 - 2.4P + 2Pe
6
7			Print Books			E-Books		Total
8			Price	Quantity	Profit	Profit		Profit
9
10			$25.00	60.00	$315	$0		$315
11
12							Combined Profit
13		E Book Seller		Qe = 80 - 4Pe				$315
14
15				E-Books
16			Price	Quantity	Revenue	Profit
17
18			$20.00	0.00	$0	$0
19

conflict between publisher and online seller. In this case, which would the publisher prefer: (1) the time when e-books didn't exist, or (2) the young e-book market when Amazon set prices?