Question - Price Discrimination
The Mall Street Journal is considering offering a new service, which will send news articles to readers by email. Their market research indicates that there two types of potential users, high-level executives and undergraduate students. Let x be the number of articles that a user requests per year. The executives have an inverse demand function PE(x) = 100 - x, and the students have an inverse demand function PU(x) = 80 - x. (Prices are measured in cents.) The Journal has a zero marginal cost of sending articles via email.
a) Draw on a graph the two inverse demand functions.
b) Suppose that the Journal can't tell which users are executives and which are students. In this case, the Journal offers two packages: a 80-article subscription and a 100-article subscription. It will have to let the users self-select the one that is optimal for them.
What is the maximum price that the Journal can charge for the 80-article subscription if it wants the students to accept this package?
What is the value of the 80-article subscription to the executives? What is the maximum price that the Journal can charge for the 100-article subscription if it wants the executives to choose this package over the 80-article one?
c) Suppose that the Mall Street Journal decides to include only 60 articles in the student pack- age. What is the maximum price that the Journal can charge for the 60-article subscription if it wants the students to accept this new package?
How much consumer surplus would the executives get from the new student package? What is the maximum price that the Journal can charge for the 100-article subscription if it wants the executives to choose this package over the 60-article one?
d) If the number of executives in the population equals the number of students, would the Journal make higher profits by offering a student package of 80 articles or a student package of 60 packages?