PRICING

Movies Case & Duopoly Case

Amreen Madhani (61920176)
Deepali Mittal (61920558)
Kushal Dalal (61920842)
Itisha Jain (61920289)
 Qs.1 Movies
Qs1 Qs2
• Currently, to watch 10 movies, Segment A would
Price Segment A movies Segment B movies Total Revenue
pay a total of 55u. If we charge anything more
10 1 0 10
than that, they will not subscribe. They don’t
9 2 0 18
have any competitive advantage over one
8 3 0 24

7 4 0 28
another in terms of product services & quality
• Segment B would pay a total of 21u to watch 6
6 5 1 48 movies so anything more than that they would
5 6 2 60 not be willing to pay.
4 7 3 64

3 8 4 60
• Therefore, profit-maximizing price is to charge
2 9 5 48
21u and attract all customers for total revenues
1 10 6 28
of 84u.
Qs.1 Movies
Qs 3
• For 15u every month, Segment A will be able to watch 10 movies for 25u and Segment B will be able
to watch 6 movies for 21u. Hence the entire segment A and segment B would be attracted for a total
profit of 84u. Period -1
Qs 4
• Let us say p = 2u, then maximum value of F will be = 10u because Segment B customers will watch
only 5 movies and pay a total of 20u.
• profit from Segment A= 10u+18u= 28u (since Segment A will watch 9 movies)
• Therefore total profit = 88u
• Similarly, if p=3u, then maximum value of F will be = 6u
• Profit from segment B= 18u*3= 54u
• Profit from Segment A= 6u+24u=30u
• Therefore total profit= 88u
• Therefore profit maximizing price to charge will be F= 10u and p= 2u for total profit of 88u
Qs.2 Duopoly- Context
■ Context
• Firm A & Firm B sell similar products.
• They don’t have any competitive
advantage over one another in terms
of product services & quality
• Both firms have the same marginal
cost
• Both firms have the same number of
loyal customers
■ Customers : Out of 100K customers:
• Firm A: 30K loyal Customer
• Firm B: 30K Loyal Customers
• 40K customers can switch to either side
based on the price
■ Assumptions
• Both the firms are not changing the price
simultaneously in one single period
• We cant price discriminate between the
loyal & new customers
Qs.2 Duopoly- Anticipating the payoffs
■ Period-0
• Our current payoff= 30,000(100-20) + 20,000 (100-20) = 4000K (Assuming we get 50% of indifferent customers)
• As we can see price>100 will not make any sense because we will lose out even our loyal customers. So, the
new price has to be lower than Rs.100
■ Period -1
• Now, if we (Firm A), reduce the price to Rs.90 in order to capture the indifferent customers, our new pay-off
would be the following:
• Payoff= 30,000 (90-20) + 40,000 (90-20)= 4900K (Higher than period 0)
■ Period -2
• In this period, firm B will also react to our price cut and reduce the price furthermore to Rs.80. This will result
in all the indifferent customers switching to firm B and we will face huge losses.
• Payoff= 30,000 (90-20) =2100K (Worse off even from the period-0)
■ Period -3
• Now, we would like to re-capture those indifferent customers because our margins have already gone down
and we would want to compensate it with more sales volume. So, we will set the new price at Rs.70.
• Payoff= 30,000 (70-20)+ 40,000 (70-20) =3500K (Worse off than period-1)
Qs.2 Duopoly- Analysis & Recommendation
■ Analysis
• As we can see, in each subsequent period (game), one firm will do a price cut and capture the
indifferent customers because they would not want to lose out on these customers by allowing
them to purchase continuously from the other firm (as they may become loyal).
• Payoffs are also going down, even if we capture all the customers because our prices are reduced
for everyone, even loyal customers.
• So, in the long run, this price cut will continue until both the firms reach at their marginal cost and
will be in a much worse off condition than the beginning.
■ Recommendation
• Therefore, firm A should not indulge in price war and continue with the price of 100 Rs.
• Alternatives
• To tap the indifferent customers, we can come up with a new product line or some price
discrimination tactics so that it does not harm our revenues from the loyal customer base.