Reference no: EM132349403

Case Study: Advanced Pricing

Please address the following case study relating to Netflix. This case study relates to Chapter 14 of the textbook.

Note: There are videos of hand-worked problems on Blackboard to accompany each section.

Please submit your work as a single Word document. When I request calculations, you can write them by hand and incorporate a photograph into the document or you can type up the calculations in the document. Similarly, you can create any tables by hand, in Word, or other ways, but your tables should be clear. The document should be approximately 2-4 pages (counting each side of the paper as a page) in length. Please indicate in some way which part of the document responds to each question. The assignment will be graded based on correctness, effort, and presentation.

Section 1. First-degree Price Discrimination (pages 575-582)

a) In your own words or using an example, describe each condition and its relevance for the three conditions for profitable price discrimination (1. have market power, 2. be able to identify submarkets, and 3. be able to separate submarkets).

b) Suppose a perfectly price-discriminating firm faces demand function:

p = 22 - Q

And has cost function:

C = 25 + 4Q + 1/2Q²

Identify the quantity he sells, the price(s) he charges, and the profits he attains. Also, solve for this firm's quantity, price, and profit under uniform pricing. Verify that perfect price discrimination increases profit and total surplus relative to uniform pricing.

Section 2. Second-degree Price Discrimination

a) Suppose Netflix has 1 million consumers who each have a demand for programming of:

f = 8 - 1/4Q

And Netflix has a cost of programming that consists of a fixed royalty payment (per show Q) of $2:

C = 2Q

Identify the optimal two-part pricing policy for Netflix and the profits attained by this two-part pricing policy.

b) Now, suppose that Netflix can identify two groups of consumers (casual users, and volume users). There are 0.75 million casual users (NC = 0.75) who each have inverse demand:

f = 9 - 1/2Q_c

And there are 0.25 million volume users (N_v = 0.25) who each have inverse demand:

f = 6 - .1Q_v

Continue to assume a cost of programming equal to a fixed royalty payment (per show Q) of $2. Netflix must charge both groups of consumers the same access fee ?? and the same fee for each program f. Under these assumptions write down Netflix's profit function as a function of only f and constants. (You do not need to solve this problem for the optimal f and A.) To set up the profit equation, you may assume that you will charge an access fee that eliminates the consumer surplus of the casual users:

A = 1/2 (9-f)Q_c

And that both the casual users and the volume users will end up paying the access fee.

Section 3. Third-degree Price Discrimination

Assume that Netflix can charge European users a different price from US users, but that the costs of providing programming to each user increases as the total number of users increases. Specifically, the U.S. has demand:

PUS = 22 - 3/2Q_US

And Europe has demand:

PE = 12 - QE

And Netflix's cost function is:

C = 30 + 5(Q_US + Q_E) + 1/2(Q_US + Q_E)²

Resulting in marginal cost:

MC = 5 + (Q_US + Q_E)

Identify the optimal price(s), quantities of customers, and resulting profits for this third- degree price discriminating firm.

Section 4. Multiproduct Strategies (pages 603-610)

a) Suppose that Netflix switches to offering a separate service for TV shows and a separate service for movies. Netflix charges its Q_TV TV customers price pTV and its Q_M movie customers p_M. Demand for the products are inter-related. Specifically:

PTV = 14 - 2Q_TV - Q_M

And:

PM = 19 - 3QM - 2QTV

And the cost function is:

C = 10 + 4(QM + QTV)

Identify the optimal quantities (QM and QTV) for Netflix.

b) Now let's contrast the separate pricing with the bundled price for both products. Suppose that there are 2 different types of users Movie-buff and TV-aholic. The number of each type and their willingness to pay are shown:

Assume that there are no costs.

i. What are the revenues from a single optimal bundle price? (Assume you don't offer the products separately.)

ii. What are the revenues from selling the products separately if you optimally choose both prices? (Assume you don't offer the bundle.)