Answer to Question #204699 in Macroeconomics for jason

Question

A best-selling author has just written a new novel (the author was paid $2 million by her publishing house, assume cost of printing is zero). The publisher’s president has been told by the marketing department that the novel will appeal to the author’s 100,000 die- hard fans living in Australia who are willing to pay as much as $30. In addition, the book will appeal to about 400,000 less enthusiastic American readers who will pay up to $5. The president is confused as how to market the novel and earn maximum profit. The president hires an economist to devise a strategy to maximize profits.

Given your understanding about price discrimination, how would the economist explain the situation to the president and what would be the option he would recommend?

Answer 1

Price discrimination is a pricing strategy where the producer or seller charges different prices to the customers on the same good.

The economist will explain to the president that price discrimination is used in order to make the most total revenue from the customers. The customers are charged closer to their maximum willingness to pay. Price discrimination is most valuable when separating the customer markets because it is more profitable than keeping the markets combined.

The economist would then recommend for the price discrimination because it will make the president earn the maximum profit.