Using Excel Solver: Suppose you are a marketing manager for Microsoft and are tr

Question

Using Excel Solver:

Suppose you are a marketing manager for Microsoft and are trying to determine how to price Word and Excel. Families tend to value Word more than Excel while businesses tend to value Excel more than Word. Some groups may want to purchase both Word and Excel. How can we determine profit-maximizing prices for this situation? Microsoft has three strategies available. • No Bundling: With this strategy Microsoft charges a price for Word and a price for Excel. A consumer who wants to buy both Word and Excel will need to purchase Word and Excel separately. • Mixed Bundling: With this strategy Microsoft comes up with a price for Word, a price for Excel, and a price for the “bundle” of software consisting of Word and Excel. • Pure Bundling: With this strategy Microsoft does not offer Word and Excel separately. All Microsoft offers is a pure bundle of Word and Excel. The key in price bundling decisions is to divide the market into relatively homogeneous segments. Each segment is assumed to assign a value or reservation price to Word alone, Excel alone, and the Word-Excel bundle. A segment’s surplus for a product is (Reservation value for product) – (Price for product). We assume all members of a segment will purchase the product that yields the maximum non negative surplus (ties are broken arbitrarily); if no product yields a non negative surplus the segment is assumed to purchase nothing. The table below gives the size of the four main markets for Word, Excel and the Word-Excel bundle. It also gives the reservation value for each segment-product combination. We assume the variable cost for each software product is $0. Determine a profit-maximizing pricing policy for 1) the no bundling case, and 2) the mixed bundling case.

Segments Reservation Prices Name Size Excel only Word Only Excel & Word Business 70,000 $450 $110 $530 Legal 50,000 $75 $430 $480 Educational 60,000 $290 $250 $410 Home 45,000 $220 $380 $390 Decision Constraints Objective: Maximum Price 1576025

Explanation / Answer

Segments

Unable to attach excel file.

Reservation Prices

First calculate Profit for each segment. and then open solver. Enter price column as a changing cell then run it. You'll get the solution.

Segments

Unable to attach excel file.

Reservation Prices

Name Size Excel only Word Only Excel & Word Profit (Excel) Profit (Word) Business 70,000 $450 $110 $530 $31,500,000 $7,699,890 Legal 50,000 $75 $430 $480 $3,750,000 $21,499,570 Educational 60,000 $290 $250 $410 $17,400,000 $14,999,750 Home 45,000 $220 $380 $390 $9,900,000 $17,099,620 $0 Decision Constraints : 2 contraints- Price and Profit can not be less than 0.

First calculate Profit for each segment. and then open solver. Enter price column as a changing cell then run it. You'll get the solution.

Max Price 1576025

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