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BF & BG Problem Set

The document presents a problem set on price discrimination involving Coca-Cola's pricing strategy for a smart vending machine based on temperature variations and a monopolist's pricing strategies for two goods with different consumer types. It includes calculations for optimal pricing under various scenarios, such as separate sales, bundling, and mixed bundling. Additionally, it discusses the Michelin case, which is not detailed in the provided text.

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13 views2 pages

BF & BG Problem Set

The document presents a problem set on price discrimination involving Coca-Cola's pricing strategy for a smart vending machine based on temperature variations and a monopolist's pricing strategies for two goods with different consumer types. It includes calculations for optimal pricing under various scenarios, such as separate sales, bundling, and mixed bundling. Additionally, it discusses the Michelin case, which is not detailed in the provided text.

Uploaded by

natalia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Combined Problem Set Price Discrimination I

and Price Discrimination II

Question 1
From Cabral (2000) Coca-Cola recently announced that it is developing a ”smart” vending machine. Such machines
are able to change prices according to the outside temperature. Suppose for the purposes of this problem that the
temperature can be either ”High” or ”Low.” On days of ”High” temperature, demand is given by Q = 280−2p, where
Q is number of cans of Coke sold during the day and p is the price per can measured in cents. On days of ”Low”
temperature, demand is only Q = 160 − 2p. There is an equal number days with ”High” and ”Low” temperature. The
marginal cost of a can of Coke is 20 cents.

1. Suppose that Coca-Cola indeed installs a ”smart” vending machine, and thus is able to charge different prices
for Coke on ”Hot” and ”Cold” days. What price should Coca-Cola charge on a ”Hot” day? What price should
Coca-Cola charge on a ”Cold” day?
2. Alternatively, suppose that Coca-Cola continues to use its normal vending machines, which must be pro-
grammed with a fixed price, independent of the weather. Assuming that Coca-Cola is risk neutral, what is the
optimal price for a can of Coke?
3. What are Coca-Cola’s profits under constant and weather-variable prices? How much would Coca-Cola be
willing to pay to enable its vending machine to vary prices with the weather, i.e., to have a ”smart” vending
machine?

Question 2
A monopolist has two goods to offer. Consumers are of three types and differ in their absolute and relative valuations
of these two goods. Each type’s maximum willingness to pay for each good is shown in the table below.
Type Good 1 Good 2
1 10 70
2 40 40
3 70 10

The marginal cost of producing each of the two goods to a household is equal to 20. Calculate the optimal price
(and restaurant profits) under each of the following three scenarios:
1. The monopolist has to sell the goods separately
2. The monopolist can bundle the goods together
3. The monopolist can use mixed bundling (i.e. it can sell the goods as a bundle and also sell them separately).
4. Now suppose consumers are of the following types:
Type Good 1 Good 2
1 35 45
2 40 40
3 70 10

What is the optimal pricing strategy here?

1
Question 3
Discussion of the Michelin Case.

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