Reference no: EM133269038

You are a high-class magazine subscription service. Half of your 100 customers appear to be more price sensitive than the other half. You know that your customers would be unhappy knowing that they are paying different prices for the same service. However, your price-sensitive customers would consider paying for less frequent service if the price were right. In fact, your less price-sensitive customers would be willing to pay $200 per month for the current (4 times per month) service and $160 per month for reduced service (3 times per month). The more price-sensitive customers are only willing to pay the current price of $155 per month for the current (4 times per month) service but would be willing to pay $130 per month for reduced (3 times per month) service. The marginal cost of the current (4 times per month) service remains $85 per month, while the marginal cost of the reduced (3 x per month) service package is $70 per month.

1. What type of price discrimination are you considering engaging in?

2. What is your incentive constraint?

3. What is your optimal pricing strategy and resulting profits?