Your software startup has just completed the latest version of BrainType, a mind-reading word processor that translates thoughts into text. Since you are the cutting-edge frontier, you have no direct competitors. As marketing manager, you must decide how to price BrainType. You commission a study that suggests that there are two markets: professional writers and dabbling hobbyists. There are one million professionals and two million hobbyists. Professionals are willing to pay up to $400 and hobbyists up to $100 for the full-feature version. A scaled-down version is worth $50 to hobbyists and nothing to professionals. Both versions are essentially free to produce. (a) What prices of the two versions generate the most revenue? (b) Suppose that, instead of the scaled-down version, the firm offers an intermediate version worth $200 to professionals and $75 to hobbyists. What prices generate the most revenue now? Is the firm better off selling the intermediate or scaled-down version?
Your software startup has just completed the latest version of BrainType, a mind-reading word processor that translates thoughts into text. Since you are the cutting-edge frontier, you have no direct competitors. As marketing manager, you must decide how to price BrainType. You commission a study that suggests that there are two markets: professional writers and dabbling hobbyists. There are one million professionals and two million hobbyists. Professionals are willing to pay up to $400 and hobbyists up to $100 for the full-feature version. A scaled-down version is worth $50 to hobbyists and nothing to professionals. Both versions are essentially free to produce. (a) What prices of the two versions generate the most revenue? (b) Suppose that, instead of the scaled-down version, the firm offers an intermediate version worth $200 to professionals and $75 to hobbyists. What prices generate the most revenue now? Is the firm better off selling the intermediate or scaled-down version?
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