Kian E.

Ageas BSA – 1 September 19, 2019

Managerial Economics (MTH – 12:30-2:00pm)

Pricing Commonly Owned Products

1. Decision making on pricing commonly owned products example would be an

android/mobile phones and their mobile applications. Since Droid-based smart
phones and Droid-based Apps are complements. The existence of more Apps
makes Droid-based smart phones more desirable and thus causes the demand for
phones to become less elastic. Since optimal simple pricing implies (P-MC)/P
= 1/|e|, this means that the desired markup. 1/|e|, has risen. As we move towards
an advancing civilization where technologies are very important specifically the
technology that are easily accessible to the hands like phones, it is not a question
that the demand of this product will keep on rising. While the sellers of this product
for an example Samsung and iPhone will keep on improving and putting more
features to their applications, competing against one another, to get the attention
and desires of the consumers. The optimal price for Droid-based phones will tend
to rise. The actual price may not in fact rise if the producers anticipated this and
engaged in penetration pricing initially. Still, the optimal price will tend to rise.

2. In a promotional and adverting scenario Music radio stations and rock concerts
in a bar is a good example, and this two tend to be complements in consumption.
The radio station can easily promote the concert and the concert venue will
advertise the station. When a firm buys a complement, it tends to reduce prices
for both. Because demand is elastic, a decrease in price will likely increase
revenues and (since marginal cost is zero) will increase profit. Therefore, it is
unlikely that both the radio station and the concert is optimizing. However, one
should investigate how variable is demand. For example if the rock concert is 80%
 full each day, then decreasing price will be optimal. On the other hand, if the 80%
capacity figure is because the venue of the concert / bar is at capacity on weekends
but nearly empty on weekdays, then prices might actually be too low. A price
reduction would increase the number of customers on weekdays, and a price
increase during weekends may keep the rock concert more profitable.

3. Price discrimination usually happens in a Market where there is only one seller
and many buyers. Since there is only one seller in this market, the seller can
charge its buyers with different prices for the same product without informing those
buyers with its decision. If the seller is conducting price discrimination in different
sets of buyers, it must be able to determine the best price for a particular set of
buyer or else it will not be able to fully maximize its profits. For example a branded
shoe company price discrimination would be to have a high price for the high value
customers and low prices for low value customers for them to be able to buy the
product and increase the profit. In order to fully maximize its profit, a seller must
set price discrimination based on price elasticity of demand for each set of
buyers.

4. Renegotiating Employment Contract

a. You have to think in terms of expected payoffs. If neither side hires a

lawyer, they each have a 50% chance of "winning" the $1 million yielding
an expected payoff of $500,000. If they both hire lawyers, they have the
same chance of winning the $1 million but they are each out $200,000 for
a net of $300,000. However, if only one side hires a lawyer, its expected
payoff is 75% ($1million) - $200,000 or $550,000 and the non-hirer earns
an expected $250,000. The Nash Equilibrium would be if both hire lawyers
or neither hire lawyers. Both sides would want to pan lawyers because
there is greater profit to be had if no lawyers where hired.
 Management
No Lawyer Lawyer
No Lawyer $500,000, $500,000 $250,000, $550,000
Labor
Lawyer $550,000, $250,000 $300,000, $300,000

b. Individual decision makers always have an incentive to choose in a way that

creates a less than optimal outcome for the individuals as a group. This
scenario is a prisoner's dilemma game. Each side individually sees that
hiring a lawyer dominates not hiring the lawyer, and so they both do. Neither
side would individually move aware from a strategy of hiring a lawyer. Both
parties choose to protect themselves at the expense of the other participant.
As a result, both participants find themselves in a worse state than if they
had cooperated with each other in the decision-making process.

c. If they could set up rules that forbid the use of lawyers, both sides would
be better off in the long run. This means that both would prefer changing
the game to ban lawyers, perhaps through arbitration, or to make lawyers
more costly.