a. There are two types of consumers for handbags. High-end consumers and low-end

Question

a. There are two types of consumers for handbags. High-end consumers and low-end High-end consumers have a wllingness to pay of. VH25z 100 while low-end consumers have a willingness-to-pay of: v, - 10z, where z is a measure of product quality, and higher is better. Coach has fixed the quality of their luxury high end bag, at 20, and is still deciding on the quality of the mass-market low-end bag. Zi Coach wants to market the high-end bag to high-end shoppers at a price pH and the low-end bag to low-end market shoppers at a price pi. To start, they need to set up "constraints" so that each consumer type buys the product targeted at them a. Start with the low-end bag. The low-end consumer must be willing to purchase it. In terms of 21, what is the constraint on the price Coach could charge to low-end consumers for the low end bag? Constraint on price of low-end bag. p. £ b. For the high-end bag, the high-end customers have to prefer it to the low-end bag. This implies a constraint for the price of the high-end bag, as a function of the low-end bag price Pc, and the two quality levels zi and ZH Constraint on price of high-end bag: pH S The range of possible quality levels for the low-end bag is 8 to 15. Manufacturing costs are S40 per bag regardless of the quality level (including the high-end bag). Which quality level should Coach choose to maximize profits if there are even numbers of high-end and low-end customers? (Hint: write out the profit function for Coach per pair of customers, assuming they charge the highest possible prices given the constraints you just solved for). c. Quality of low-end bag: z^ -. Is it worth it for Coach to offer both bags instead of just offering the high-end one? o Absolutely o Not a good idea. d. The manufacturing group did not understand the strategy, and procduced the low-end bags with a quality of z 16. In an effort to salvage the price discrimination effort, Coach realized it can "damage" the low-end bags by making them only available at outlet stores that are located hours outside of major cities. By how nmch does this have to "damage" the low end bags (i.e. by how uch mst it lower zL) for it to be worthwhile to offer the low-end bag at all? It nmst "damage" the bags by more than:

Explanation / Answer

a free market is an idealized system in which the prices for goods and services are determined by the open market and by consumers. In a free market the laws and forces of supply and demand are free from any intervention by a government, by a price-setting monopoly, or by other authority. Proponents of the concept of free market contrast it with a regulated market, in which a government intervenes in supply and demand through various methods - such as tariffs - used to restrict trade and to protect the local economy. In an idealized free-market economy, prices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without intervention by government policy.

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