Assignment 6 – Price Discrimination

[Tzu-Hui (Emily) Wu, Ankeet Bhattacharya, Anuj Asthana, Clinton Fernandes, Shubhang Tripathi]

a. What version(s) should you produce and what pricing strategy should you follow if you can act
as a 1st-degree price discriminator on any and all software?

If we can act as a 1st-degree price discriminator, we would be able to sell all software at the price each
group wants.
Therefore, the table below shows the price for each group in different software versions

Industrial Version

Commercial Version:

Student Version:

Based on the information from the tables above, it shows that we could generate the most profit if we
provide produce the industrial version.
 b. In part a, how would you go about identifying your demanders and preventing people from
different segments from buying the other softwares? Be innovative in how you do this. lay out in some
depth how you will identify demanders and prevent resale and think about how much it will cost to
follow these policies and enforce them.

Ways to identify demanders and preventing them from buying other software versions:
1. Promotion through targeted emails
Set up marketing campaigns to segment the user-base and send targeted emails and
promotional offers
Estimated campaign costs = $200,000

2. Attending segment specific trade shows to market the product

Participating and presenting at trade-shows and conventions to show-case your product for
specific use-cases
Estimated cost of promotion and attendance = $500,000

3. Offer free trial periods to acquire new customers

Free trial periods get the customer hooked to using the application and the customers are much
likelier to keep using the product and pay for it after the trial period ends
Estimated costs incurred depends on the one/two-month subscription costs

4. Establish a freemium model

Provide free version of the basic software and get the users to pay for additional features as the
customers get hooked on to the functionality
Estimated costs = None

5. Initiate referral program and incentivize customers

Incentivizing customers for referrals promote the product through users thus helping to reach
more demanders usually in the same segment as the referring customer
Estimated cost of campaign = $100,000

Ways to prevent resale

1. Enforce copyright laws
Copyrights are the most traditional ways to restrict resale and unauthorized use. The costs to
get a copyright is negligible, although, law-suits against the offenders would require a legal team
on the payroll.
Estimated cost = $300,000 annually (depending on size of legal team)

2. Establish a subscription model

Subscription model causes the users to authenticate their access on a regular basis as well as
requires them to keep buying the product year-after-year. There are incremental costs due to
the subscription model as you need to keep updating the product regularly
Estimated software development costs = $2,000,000 per year

3. Student version access enforced through .edu email check. Also provide group rates and online
sharing platform to support collaboration and thus improve growth
Estimated cost of feature development and maintenance = $100,000 annually
 4. For each version, the users need to verify their identity corresponding to the user license they
purchase before activating the product
Cost of implementing product activation key framework = $50,000

c. Consider the situations where you can only charge one price for a specific type of software. If
you produced only one type of software, what price would you choose for that software. Answer this
question for each of the three types of software. If you could only produce one software, which of the
three software types would you produce?

Assume each Market Segment as the following code

Large, Multidivisional corporations ="A", Corporate R&D and university laboratories ="B",
Consultants and professional companies="C", Small Business="D", Students="E"

Industrial Version
Price for student-
Market Segment Demand Quantity Students' Demand Quantity Price bookstore commission Variable cost Dev. Cost Profit
A 5,000 2,500 35 150,000 12,175,000
A,B 7,000 2,000 35 250,000 13,505,000
A,B,C 27,000 600 35 450,000 14,805,000
A,B,C,D 42,000 300 35 650,000 10,480,000
A,B,C,D,E 42,000 500,000 100 60 35 950,000 14,280,000
Completion cost 500,000

For Industrial Version, the price should be $600

Net profit when the price is $600 = $14,805,000 – 500,000 = $14,305,000

Commercial Version
Price for student-
Market Segment Demand Quantity Students' Demand Quantity Price bookstore commission Variable cost Dev. Cost Profit
A 5,000 1,200 25 150,000 5,725,000
A,B 7,000 1,000 25 250,000 6,575,000
A,B,C 27,000 300 25 450,000 6,975,000
A,B,C,D 42,000 225 25 650,000 7,750,000
A,B,C,D,E 42,000 500,000 60 36 25 950,000 6,020,000
Completion cost 200,000

For the commercial version, the price should be $225

Net profit when the price is $225 = $(7,750,000 – 200,000)

Student Version
Price for student-
Market Segment Demand Quantity Students' Demand Quantity Price bookstore commission Variable cost Dev. Cost Profit
C 20,000 200 15 200,000 3,500,000
C,D 35,000 175 15 400,000 5,200,000
C,D,A 40,000 150 15 550,000 4,850,000
C,D,A,B 42,000 100 15 650,000 2,920,000
C,D,A,B,E 42,000 500,000 50 30 15 950,000 8,020,000
Completion cost 100,000

The price for the student version should be $50

Net profit when the price is $50 = $(8,020,000 – 100,000) = $7,920,000
Going by the above data, we can say we would choose to only produce the industrial version because it
produces the highest profits.

d. Consider the situation where you can successfully target different software to different
markets but you can only charge one price for each type of software. What version(s) of the software
would you produce and what price would you charge for the version(s)?

Assume each Market Segment as the following code

Large, Multidivisional corporations ="A", Corporate R&D and university laboratories ="B",
Consultants and professional companies="C", Small Business="D", Students="E"

From the tables in question C, we know that when we sell the industrial version at $600, the profit is the
highest. As a result, we would choose to provide the industrial version at $600 first. However, we can
only target group A, B, C when we sell the industrial version at $600.
Next step is to identify the software version and price for group C and D to generate the highest profit.
From the tables in question C, we know if we set the price at $225 for commercial version, we could
capture group D. In order to capture the remaining group E, we would sell students the student version
at $50
The table below shows the price and target group for each software version

e. Consider the situation where you can charge only one price for each type of software but you
are unable to keep buyers in each market segment from buying any of the three types of software. What
version(s) would you produce and what price would you charge for the version(s)?

Considering the industrial version could generate the highest profit, we would include industrial version
in all combinations

1. Combination of industrial version and commercial version

From the commercial version table in question C, we know that when we lower the commercial
version price to capture student group, our profits decrease. Therefore, we would lose the
student group if we choose this combination. Therefore, we would choose the second
combination (industrial and student) because it can capture the most clients
2. Combination of industrial version and student version:
We would set the price of student version at $50 to capture the student group. We would like to
make sure that the Large, Multidivisional corporations; Corporate R&D and university
laboratories; Consultants and professional companies to prefer “Industrial” version over
“Student” version because it generate the highest profit when we capture the first three groups
The first step is to determine the highest price for industrial version when the price of student
version is $50.
Compare the consumer surplus between industrial version and student version to decide the
product that each group would choose and calculate the total profit for the price combination

Option 1: Industrial version price: $2400, Student version price: $50

Option 2: Industrial version price: $1950, Student version price: $50

Option 3: Industrial version price: $450, Student version price: $50

Among all the options, we would choose option 2

We would set the industrial version price at $1950 to target Large, Multidivisional corporations;
Corporate R&D and university laboratories.
For the student version, we would set $50 to target Consultants and professional companies,
small business and students