Cindy has a publishing company and is publishing a handbook for managers on how to deal with difficult people (both subordinates and bosses) in two markets: North America and China. The book is published as an e-book only, so that it would be easy to price discriminate based on location of the buyer. Moreover, e-book has the benefit of accessibility on any device and any location. There is only an English version of the book that is sold in both markets. They run a market analysis survey to estimate the inverse demand equation for their product. The following is the inverse demand curve for the North American market: PNA = 120 – 0.001QNA PNA is the price of a copy if it is bought in North America and QNA is the number of copies demanded in North America. The company knows that their inverse demand for the Chinese market is: PC = 70 – 0.002QC PC is the price of a copy if it is bought in China and QC is the number of copies demanded in China. Suppose that the average variable cost as well as marginal cost per copy is $0.20 irrespective of the market (and is constant over the range of output under consideration).
A) Assuming that the publisher is able to practice third degree price discrimination for the two markets, what prices would you advise the company to adopt, for the markets in North America and China? How many copies will be demanded, if the estimates of the inverse demand functions are correct? What is the per-unit contribution and the total contribution for each market? Show your work. ‘High-Income’ (HI) market ‘Low-Income’ (LI) market PNA = __________ PC = __________ QNA = __________ QC = __________ Contribution per copy (NA) = ___________ Contribution per copy (China) = ___________ Total Contribution (NA) = _____________ Total Contribution (China) = ______________
Show your work here and on the next page if necessary:
B) Calculate the point price elasticity of demand at the profit maximizing price and quantity for each market segment. (Calculate up to six decimal places). Then use the optimal markup formula for each market. Comment on the relative markups in the two markets, as they relate to elasticity. Which market has the larger markup of price over marginal cost? Why does this make sense from a profit maximizing perspective? North America market: China market:
C) Imagine the fixed cost of developing the e-book is 1.5 million dollars. Suppose the company decides to divide the fixed cost equally between the two markets. Calculate the profits for each version. Profit (NA) = _____________ Profit (China) = ______________
D) Based on these profits, the chief accountant suggests that it does not look like the China market will break even, given the fixed costs and variable costs associated with the production. Is the chief accountant correct? Should the publisher continue with its plan to offer the book in China? Briefly explain why or why not?