Question

#11

AT&T 44% E4 Use the following in the questions 8-10. Be sure to show all of your math step-by-step. Alcoa and Kaiser, duopolists in the market for primary aluminum ingot, choose prices of their 500 foot rolls of sheet aluminum on the first day of the month. The following payoff table shows their monthly payoffs resulting from the pricing decisions they can make Alcoa High price Low price Kaiser High price A $400, $500 3 $175, $575 Low price 5525, $200 $273, $250 Suppose Alcoa and Kaiser repeat their pricing decision on the first day of every month. Suppose they have been cooperating for the past few months, but now the manager at Kaiser is trying to decide whether to cheat or to continue cooperating, Kaiser's manager believes Kaiser can get away with cheating for two months, but he also believes that Kaiser would be punished for the next two months after sheating. After punishment, Kaiser's manager expects the two firms would return to cooperation Kaiser's manager ignores the time-value of money and does not discount future benefits or costs. 8. What is the monthly gain to Kaiser from cheating? What is the present value of the benefit from cheating for the two months of cheating? 2. What is the monthly cost of punishment to Kaiser? What is the present value of the cost of cheating for the two months of punishment? 10. Will Kaiser cooperate or cheat? Explain. 11. Suppose you were asked to manage a golf course that was currently charging a uniform price. Would you suggest that the course continue with this price plan or switch to a two-part pricing plan? Explain your decision and how you would choose the optimal price

Answer 1

First let's understand what is two part tariff system. This is nothing but a method of price discrimination wherein the consumers are charged initially with a lump sum fee and a per unit fee is charged later on. In simple words, you pay for add ons after an intial payment. In the current scenario, lot of firms practice this in competitive markets. Now let's come to the question here. The underlying fact is that playing golf is a costly affair to say the very least, hence you can expect customers willing to pay some bucks extra provided optimal service is provided. This fact here can be leveraged by the golf course to make some profit here. How? By using two part pricing. We need to switch to a two part pricing system to stay in the market, else some other golf course might take over! Now how do you set the two part pricing in this case? Well, we can quote a fixed price say X to the consumers to use the golf cart, golf sticks (in case they haven't brought their own), etc. for 1 hour. This fixed price X should be below the market average for golf courses (though you're rich, you would care to save some bucks!), and as the time spent by the consumer increases we can have a charge for every half hour spent by the consumer after this (imagine the parking scenario in a mall). This way of leveraging two price tariff system not only brings us profits, but a scope to manage the demand in the golf course and gain more customers as time progresses. The optimum price needs to be chosen with considerations of the market demand and the current market conditions. Competitive prices can help achieve the motto here basically.

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