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AT&T pricing strategy, RV pricing strategy

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In the first half of the twentieth century, AT&T had a near monopoly on local and long distance phone service. The firm charged a price for local telephone services that was roughly one-half of its cost of providing the services. In contrast, it charged almost two times it cost for long distance services. Why do you think AT&T adopted this pricing strategy?

Briefly explain why a used recreational vehicle (RV) that is only six months old and has been driven only 10,000 miles typically depreciates and costs at least 20 percent less than a new RV with the same options. Use pricing strategy and managerial economics to support your answer.

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Solution Preview

AT&T adopted the strategy as a means of cross subsidization. Cross subsidization is a pricing strategy where the company charges higher prices to one group (the long distance customers) in order to charge low prices to a second group (the local phone customers). Another example other than AT&T of this practice would be the banking industry, where its common for a bank to charge high account fees to a specific group of customers (those who don't meet minimum balance requirements), and to not charge fees, or charge lower fees to another group (those who keep a minimum balance in the accounts). Specifically with ...

Solution Summary

The solution provides a detailed discussion of why AT&T adopted their pricing strategy. This solution also discusses why a used recreational vehicle (RV) typically depreciates and costs at least 20 percent less than a new RV with the same options.