What would you do?
A Substack blogger keeps the streak alive by making the reader do the work
I’m on vacation this week without my computer, so there’s not enough time for an original post. Instead, I thought it would be fun to pose a few challenges to the reader. Here are two problems related to pricing.
Problem 1: Competing for market share
You’re the CEO of firm A. You and your rival, firm B, are the only competitors in a market for some product. Suppose that the products are not really differentiated, so market share is determined primarily by price differences. More precisely, the market shares m_A and m_B are each a function of the prices p_A and p_B:
Notice that m_A + m_B = 100, indicating that, combined, the two firms serve the entire market regardless of price. (The number 1.5 encodes the price sensitivity of the customers, on average.)
You are first to market, so firm A sets its price first. Firm B then sets its price. The question is:
What price should firm A select for its product, given that both firms know the other will try to maximize profits?
Problem 2: Pricing a bundle
Let’s say that Disney wants to bundle two of its streaming services: Disney+ and ESPN+. It has four customer archetypes, listed below, each of which is willing to pay different amounts for each service. Assume that the groups are roughly the same size.
The question is:
Should Disney bundle these apps? If so, how should it price the bundle and each of ESPN+ and Disney+ separately in order to maximize revenue?