Question

. Cosmo Cosmetics sells eye liner and mascara to three different types of customers. Below is the information on the valuation for each product for each customer type. Assuming zero costs of production, what pricing scheme will yield the highest profits for Cosmo Cosmetics? Eyeliner $50 $75 $90 Customer Type Mascara $60 $50 $30 A B C

Answer 1

Since production cost is zero in this case, Profit=Total Revenue generated.

We need to look at the pricing strategy that generates maximum revenue.

Case of individual pricing for each product

Product : Mascara

There are 3 price options.$60, $50 and $30

At a price of $60, only one customer (A) will buy it. Total Revenue is $60 in this option.

At a price of $50, two customers (A, B) will buy it. Total Revenue is 2*$50 i.e. $100 in this option.

At a price of $30, all customers (A, B and C) will buy it. Total Revenue is 3*$30 i.e. $90 in this option.

Revenue i.e. maximized at a price of $50. So, optimal price for Mascara is $50

Product : Eyeliner

There are 3 price options.$50, $75 and $90

At a price of $90, only one customer (C) will buy it. Total Revenue is $90 in this option.

At a price of $75, two customers (B and C) will buy it. Total Revenue is 2*$75 i.e. $150 in this option.

At a price of $50, all customers (A, B and C) will buy it. Total Revenue is 3*$50 i.e. $150 in this option.

Revenue i.e. maximized at a price of $50 and $75. Seller is indifferent for these two prices.

Total Revenue (Profit) in case of individual pricing =100+150=$250

Now Let us examine the case of bundle pricing

Valuation of bundle of 1 unit of Mascara and 1 unit of Eyeliner for customer A=60+50=$110

Valuation of bundle of 1 unit of Mascara and 1 unit of Eyeliner for customer B=50+75=$125

Valuation of bundle of 1 unit of Mascara and 1 unit of Eyeliner for customer C=30+90=$120

Price options for each bundle (set of 1 unit of each product) are $110, $120 and $125

At a price of $125, only one customer (B) will buy it. Total Revenue is $125 in this option.

At a price of $120, two customers (B and C) will buy it. Total Revenue is 2*$120 i.e. $240 in this option.

At a price of $110, all customers (A, B and C) will buy it. Total Revenue is 3*$110 i.e. $330 in this option.

Revenue is maximized at a price of $110 per bundle (set of 1 unit of each product)

Total Revenue (Profit) at optimal price in bundle price=$330

We can find that bundle pricing leads to higher profit. So, Bundle pricing at a price of $110 per bundle (set of 1 unit each) will give higher profit.