Question

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SoS (Sounds of Silence, Inc) prepares to launch a revolutionary system of bluetooth-enabled noise-cancellation headphones. It is estimated that about 800,000 consumers would be willing to pay $450 for the headphones; an additional 1,500,000 consumers would be willing to pay $250 for the headphones. Though SoS knows this marketing information, it cannot identify a consumer as belonging to one group or the other. SoS is considering the launch of a stripped-down version of the headphones (the stripped- down version uses wires instead of bluetooth). The 800,000 high-valuation consumers would only be willing to pay $325 for the stripped-down version. The remaining 1,500,000 con- sumers don't particularly care about bluetooth vs. wire connections; they are willing to pay the same $250 for either version. Both the bluetooth version and the stripped-down version cost the same to produce: $100 per unit. 1. Determine the optimal pricing policy assuming that SoS only sells bluetooth-enabled headphones. 2. Determine the optimal pricing policy assuming that SoS offers the two versions. 3. Suppose that SoS finds out that the estimate regarding the number of low-valuation users is overly optimistic. In fact, there are only 300,000 consumers who would be willing to pay $250. How would you change your answer to (a) and (b)?

Answer 1

1. The optimal pricing policy depends on the price elasticity that a customer is willing to pay for the product. In the given case, there is more elasticity in the price and the number of customers willing to pay for the Bluetooth device. As the population goes up from 8,00,000 to 15,00,000, the consumers willing to paying more for the same device goes down. This can be linked with the law of demand that as the more of the commodity is demanded, the customer is willing to pay a lesser price for it. The elasticity of the product gets higher as it is demanded more, The optimal price that can be assigned to the product should be as per the rest of the 1500,000 population, i.e., $250 because lower the price of the commodity, higher will be the sale of the product.

2. In today's scenario, Bluetooth headset is more in demand, therefore, when the firm is selling both kinds of headset, the one which is having Bluetooth will be more in demand by the high valuation population, it would be profitable to charge the amount of $325 for Bluetooth headset whereas $250 for stripped-down model. The reason being that the Bluetooth model will be demanded by more of the population and not observing a big difference between Bluetooth and wired model, the customers will be willing to pay for Bluetooth device, while if not Bluetooth then the more sale of the Bluetooth device will be there because of such cheap price.

3. a) As the population is really less who is paying $250 and more are there to pay a higher amount, we can set the price a bit higher than $250 but not as much as the high valuation consumers because then the low valuation users will not be able to afford the product. So, the product can be priced at $350 so that both the categories of customers can be partially satisfied with the price offered for the product.

b) The products will still be offered at the same price because the Bluetooth device is still technically more advanced than the stripped-down version and the firm had already set its price lower than what the population was willing to pay. And the stripped-down prices are set at the already demanded prices.