Suppose that your team has bee
Suppose that your team has been hired by a high-tech, consumerelectronics firm to provide an economic analysis of how to pricethis new product in such a way that maximizes the company’sprofits. In today’s technologically driven world, there are somepeople who enjoy becoming the first adopters of a new product. Mostpeople, however, seem to hold back to see the development of theproduct before they jump in.
Are there any strategies that the firm can take so that they canfully use the knowledge of the relative elasticities? As a result,you will need to investigate what market separation is. Is thereany way that we can use market separation on the two markets andincrease revenues? In these sorts of markets, we might also seelagged demand and network effects. What sort of pricing strategiesdo firms have to follow when these conditions are present?
Answer:
Yes. the firm can take up strategies o that they can fully usethe knowledge of the relative elasticities. The pricing strategybest suited for such a market is Peak Load Pricing. The consumerswho are first adopters of a new product have a demand curve whichis relatively less elastic as compared to the demand curve of theconsumers who hold back to see the development of the productbefore they jump in. The consumers who have a less elastic demandcan be charged a high price as compared to the consumers who have amore elastic demand of the product.
Market separation in the market can help to increase revenue ofthe product. Market separation can be done by using the strategy ofPeak Load Pricing mentioned in the paragraph above. Separatingmarkets by charging different prices to each set of consumers willhelp in increasing demand.
Lagged demand helps in formulating the elasticities of demand ofthe two consumers.This will help in setting prices in two types ofmarkets. In case of network effects, the demand of the productincreases as more and more people have more of the product. Thus,initially less price of the product can be charged and one thedemand of the product increases because of network effect, theprice of the product can be increased. Thus, different strategiesare used in different cases.
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