Suppose that JVC is trying to decide how to price a new stereo system composed of a receiver, CD player, and speakers. The company's economists have estimated that two different groups will purchase these products: students and club owners. The economists' analysis suggests that the total market for its brand of stereos consists of 10000 students and 50000 club owners. In addition, it is estimated that the maximum amount each group will pay for each stereo component is as follows:
Group Receiver CD Player Speakers
Students $250 $150 $100
Club owners $200 $75 $250
JVC's objective is to maximize revenues, and it is considering three strategies to price its stereo components: 1. a standard strategy whereby it prices each stereo component separately; 2. perfect price discrimination; or 3. bundling the three components together and selling only bundles containing the receiver, CD player and speakers.
a. If JVC uses a standard pricing strategy, what price should it charge for the receiver, for the CD player, and for the speakers to maximize revenues? What are the revenues they will earn through this strategy? Please show all your work.
b. Suppose JVC adopts a first-degree price discrimination policy. What prices should it charge to maximize revenues? What are JVC's revenues using this strategy? Again, please show all your work.
c. Suppose that JVC markets the receiver, CD player, and speakers together. That is, it uses a commodity-bundle strategy such that the products are sold as one item. What price should JVC charge to maximize revenues? How much will it earn?
The solution evaluates several pricing strategies in an attached Excel file.
Successful vs. Unsuccessful Innovations
What are the critical differences in the timing and positioning of successful versus unsuccessful innovations?
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