One of the offenders cited in the article is the Royal Economic Society's Economic Journal, which charges about 50% more for library subscriptions in the U.S. than in the U.K. Figures on actual sales and publication costs are not provided in the article, but suppose that an investigation reveals the following data regarding the relationship between prices for this journal and U.K. and U.S. sales:
Price per U.K. U.S.
subscription subscriptions subscriptions
$50.00 500 5,500
$60.00 400 5,000
Furthermore, suppose that the marginal cost of printing and delivering the journal to each additional subscriber is only $20 per year whether the subscription is sent to the U.S. or the U.K., while the costs of soliciting, editing, and typesetting articles for the journal comes to $260,000 annually.
1. Using these data, draw and label the (linear) U.K. and U.S. demand curves.
2. Calculate the profit maximizing price and quantity of subscriptions for the U.K. and indicate each on the appropriate graph. Do the same for the U.S.
3. What are the total profits to the Royal Economic Society annually from the sale of the journal at these prices?
4. Given that the price charged in the U.S. is so much higher than in the U.K., shouldn't the Royal Economic Society be able to increase its profits by reallocating its current production away from the U.K. and toward the U.S.? Why or why not?
5. If the Royal Economic Society were forced to charge the same price to all subscribers, the profit maximizing price per subscription would be $85.00. If this is the best single price that the R.E.S. can get for its journal, what level of output should the R.E.S. plan for next year?
Explain.
6. Would elimination of differential pricing leave journal readers better or worse off in this case?