INDIVIDUAL ASSIGNMENT #2

MANAGEMENT 107
Athena Mao
79661291
MGMT 107

Q1. (10 pts)

Below is a table of average sale information that a local small grocery store has collected from
4pm to 6pm on every Friday.

a) Use Market Basket Analysis (Support, Confidence, and Lift) to compare two cases.

Case 1: Consumer who bought potato chips also bought milk

 Support: 3/50 = 0.06

 Confidence: 3/10 = 0.3
 Lift: 0.3/0. 18 = 1.667

Case 2: Consumer who bought soda also bought milk

 Support: 1/50 = 0.02

 Confidence: 1/12 = 0.0833
 Lift: 0.0833 / 0.18 = 0.4629

b) What does the result in a) imply? Please interpret the results in a).

The support probability suggests that the probability of that potato chips and milk are bought
together is 0.06 and the probability that soda is bought with milk is 0.02. The confidence
implies that there is a 0.3 probability that a customer will buy milk given that they bought
potato chips; there’s a 0.0833 probability that a customer will buy milk given that they bought
soda. The lift probability suggests that the likelihood that people buy milk when they buy

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potato chips increases by 67%; it will decrease by 54% if consumers buy milk when they buy
soda.

c) Based on the results in a), suggest a strategy which the store owner could implement to increase
sales of milk.

From the information in part a and b, we can see that the sale of milk improves alongside the
sale of potato chips. The store owner could place the potato chips and milk next to each other
on the shelves to implement the increase sales of milk. The store could also provide a
promotion in which milk and potato chips are sold in a bundle.

Q2. (10 pts)

You are selling a software product called “Link” which is available in high and low quality
versions called Link Professional and Link Home respectively. You have 2 units of Link
Professional and 2 units of Link Home.

There are 2 potential customers, each of whom is interested in buying 1 unit of Link (either Link
Professional or Home but not both). Suppose that your objective is to maximize the total revenue
from selling the software. Further, you do not know the identity of either buyer and you must sell
by posting one price for Link Professional and another price for Link Home. Each buyer seeks to
maximize her consumer surplus and may buy Link Professional or Link Home or neither
depending on the prices that you post. Please show all intermediate steps and clearly explain
your reasoning.

i. What is the optimal price and resulting revenue under the following scenario? What (if anything)
would each customer buy?

Let P be the price of Link Professional and H be the price of Link Home.

1. P = 600, H = 400
Professional-Buyer A’s surplus = 600 – 600 = 0
Professional-Buyer B’s surplus = 500 – 600 = -100
Home-Buyer A’s surplus = 400 – 400 = 0
Home-Buyer B’s surplus = 300 – 400 = -100
Buyer B won’t buy Link Professional or Link Home because his/her surplus is -100.
Buyer A has the same surplus for buying Link Professional and Link Home, so he/she
would be indifferent. The company should sell Link Professional to Buyer A for $600 to
maximize the company’s profits; revenue would be $600
2. P = 600, H = 300
Professional-Buyer A’s surplus = 600 – 600 = 0
Professional-Buyer B’s surplus = 500 – 600 = -100

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Home-Buyer A’s surplus = 400 – 300 = 100
Home-Buyer B’s surplus = 300 – 300 = 0
Buyer A would buy Link Home because it maximizes his/her surplus. Buyer B will want
to buy Link Home because it also maximizes his/her surplus. The company should then
sell Link Home to both buyers at $300; revenue would be $600.
3. P = 500, H = 400
Professional-Buyer A’s surplus = 600 – 500 = 100
Professional-Buyer B’ surplus = 500 – 500 = 0
Home-Buyer A’s surplus = 400 – 400 = 0
Home-Buyer B’s surplus = 300 – 400 = -100
Buyer A and B would want to buy Link Professional because it would maximize their
surplus. The company should then sell Link Professional to both buyers at $500 each, so
the revenue would be $1000.
4. P = 500, H = 300
Professional-Buyer A’s surplus = 600 – 500 = 100
Professional-Buyer B’s surplus = 500 – 500 = 0
Home-Buyer A’s surplus = 400 – 300 = 100
Home-Buyer B’s surplus = 300 – 300 = 0
Both buyers are indifferent are to both products because they offer the same surplus to
the buyer. The company should sell Link Professional to both buyers to make a revenue
of $1000.

ii. If you could identify each buyer and make targeted offers, what price would you offer to each
and how much revenue would you earn? What (if anything) would each customer buy?

For buyer A, the company should offer Link Professional for $600 and Link Home for a price
greater than $400; buyer A would buy Link Professional. For buyer B, the company should
offer Link Professional for $500 and Link Home for a price greater than $300; buyer B
would buy Link Professional. This would create a revenue of $1100.

Scenario The willingness to pay (WTP) of the 2 potential buyers is:

Q3. (10 pts)

Read part of 2013 Macworld article about Appstore below to answer the following questions:

a. Does Appstore provide a two sided platform.? If yes, are there same side and cross side network
effects? Please explain.

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Yes, the App store provides a two-sided platform that provides benefits to both the user and the
app developer. The users are provided numerous apps that they are able to download and buy;
once they have the app on their device, they can use the app freely. The app developer creates the
app and benefits from the downloads of the users; the more users there are for the app, the more
valuable the app is. The App store provides a cross side network effect because the user and the
developer are dependent on each other. The developer is dependent on the users because the
users are the source of their pay. The more users the app has garnered, the more the app can
grow; users are also a source of funding for future developments. The users are dependent on the
developers as they are the source for new apps and new updates of already existing apps.
Without the developers, the App store would have no content for the users to download.

b. Does Appstore operate in a market that exhibits “winner take all” dynamics?

Yes, the App store operates in a market that exhibits a “winner takes all” dynamic. It has high
homing costs as consumers have to pay to download and use the apps offered in the App store.
The App store also has strong and positive cross side network effects because the developer and
user are dependent on each other. The developers need consumers to buy their apps and the
consumers need developers to create new apps and new updates. Consumers also have
undifferentiated preferences for the apps that are made. The app that is made available on the
App store is the same for every user; the app doesn’t vary for each user.

The App Store turns five: A look back and forward

By Lex Friedman Jul 8, 2013

Five years ago, the App Store was born. A million apps, billions of dollars, and an uncountably
high number of Angry Birds later, the store is unquestionably a smashing, unrivaled success.
These days, customers download more than 800 apps every single second.

When the iPhone launched in 2007, Steve Jobs famously told developers that they could write
“apps” for the device by creating Web apps. Developers mostly scoffed at that pronouncement —
some went so far as to jailbreak their phones just so they could play around with creating
software for the revolutionary new device.

Respite came in March 2008, when Apple laid out the roadmap for iOS development—including
a software development kit (SDK) for programmers to write their own apps—and announced
that it would provide a storefront through which developers could sell their software.

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The App Store launched on July 10, 2008, with a whopping 552 apps on its virtual shelves; the
most common prices were $1 and $10, and there were a mere 135 free apps.

In the intervening years, the App Store has made some developers fabulously wealthy; gave
some a new, stable career; and left others with broken dreams and disappointments. But owners
of iOS devices didn’t focus on the App Store lottery—they simply cheered the many awesome
new abilities their devices gained.

This is the story of the App Store’s success; it s a success that has come in the face of plenty of
issues with the store, many of which persist even to today. But more on that in a bit.

Not so humble beginnings

Among those 552 launch apps were many that still grace our home screens: MLB.com At Bat,
Facebook, Yelp, Shazam, and Super Monkey Ball, to name a few. The App Store launched
simultaneously in 62 countries; then, as now, it was accessible from a devoted iOS app, or as a
feature sort of crammed into iTunes.

The App Store’s first weekend saw more than 10 million app downloads. Less than a month later,
Sega’s Super Monkey Ball hit 300,000 downloads, netting Sega $3 million and Apple more than
$1 million of its own, thanks to the store’s 70/30 revenue split.

By September, the store had surpassed 100 million downloads, and when the end of 2008 rolled
around, the most downloaded app of the year, with 5 million downloads, was Facebook. Of
course, since that particular app was (and remains) free of charge, those downloads didn’t
translate directly into dollars for Facebook or Apple. But as the App Store’s fortunes rose, so too
did the iPhone’s, and later the iPad’s. And Facebook’s mobile usage went through the roof.

This is a part of the article on MacWorld. You may read full article here:

http://www.macworld.com/article/2043841/the-app-store-turns-five-a-look-back-and-
forward.html

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