TLA 1: Mini- Case Discussion: Inexpensive Leather Portfolios

Impress4Less is working with a nearby b-school’s entrepreneurial club in proposing to

roll out a national launch of their nice-looking but inexpensive portfolios for $50. This
past year served as a test market at the b-school. Given the friendly partnership and
as a learning opportunity for the students, Impress4Less shared some information on
basic cost structures. Their fixed cost on this project were $3,000 and variable costs
were $10 a folio.
Currently at the b-school, the situation as it looks in the next figure (on the left); that
is, 200 folios were sold during the last academic year at the $50 price. But the club
members get regular feedback (from classmates) that $50 price tag seems steep, so
they are asking Impress4Less for a price cut of 10%, essentially going to the figure
ate the right.

Mini-Case Discussion Questions:

1. How many portfolios would they have to sell at $45 to at least meet last year’s
profit?
2. Should Impress4Less drop prices further? Could they raise prices above $50?
3. What assumptions are you making?

TLA 2: Pricing Game

Pricing Game
Instructions
You are pricing a new product. Your goal is to maximize revenues by charging
appropriate prices for the first 1000 customers. You do not have any historical data,
but you believe that the willingness-to-pay of your customers are normally
distributed. You have the opportunity to experiment with prices for the first fifteen
customers, after which you need to Lock a price for the remaining 985 customers.

You should consider how to collect information from the first fifteen customers and
how to use it to estimate the best single price. You may look at the normal
distribution plot to assist in your estimation.

  Source: http://www.randhawa.us/games/pricing/
  

TLA 3: Dynamic Pricing Game

Dynamic Pricing Game We will play the Dynamic Pricing Game next class.

As preparation, please think about the game, answer the questions on the opposite
side, and turn in this sheet to the TA at the beginning of next lecture.

Description of Dynamic Price War:

There are 100 customers and two firms.

Loyalty Stage: Each firm decides whether to create a loyal customer case. At a cost
of $250, each firm can guarantee that 30 customers will definitely buy its product
regardless of the prices.

Pricing Stage: Coin-flip determines which firm goes first. Both firms start with tentative
price equal to $50. To keep things simple, firms are only allowed to set price equal to
$50, $40, $30, $20, or $10.
The Pricing Stage ends as soon as both firms have had a move and someone
announces “No Change”.
If prices stay $50 for both firms, each firm splits the market, selling 50 each
If one firm ends up with a lower price, then the low-priced firm gets all customers who
are not loyal to the high-price firm (either 100 or 70) while the high-price firm only sells
to its loyal customers (0 or 30)
If both firms end up with the same price, less than $50, then whoever was first to set
that price gets all customers who aren’t loyal to the other firm (100 or 70) while that
firm only sells to its loyal customers (0 or 30) Payoffs in the Game.
Each firm wants to maximize its own profit = revenue minus its cost for loyalty (either
$0 or $250) … firms have no other costs.

Example of play. (This example is not intended to illustrate good or bad play.) In
Loyalty Stage, firm A creates loyalty while firm B does not. In Pricing Stage, Firm B
wins the coin flip. It stays at $50. Firm A then lowers its price to $30. Firm B then
lowers its price to $20. Firm A then stays at $30 ending the game. Firm A’s profit is
30*$30 - $250 = $650. Firm B’s profit is 70*$20 - $0 = $1400. 15.040 Game Theory
for Managers Professor David McAdams How would you play? What would you do in
the following two situations?

Please briefly explain your answers.

1. You have invested in Loyal customers, but the other firm has not. They win the coin
flip and decide to undercut you with price $40. How would you respond? Why?

2. Neither you nor your opponent has invested in Loyal customers. You win the coin
flip. Do you stay at $50 or undercut? If undercut, what price? Why? 3. Which do you
plan to do: invest in Loyal customers or not? Your Name:
__________________________

Source: https://ocw.mit.edu/courses/sloan-school-of-management/15-040-game-theory-for-
managers-spring-2004/games/lec6_price_game.pdf