Use the following to answer question:
Table 10.3
-(Table 10.3) Suppose that Fender is trying to practice indirect price discrimination through versioning. It plans to offer the cheaper American Standard version of its guitar for consumers who are highly price-sensitive and the more expensive American Deluxe version to those who are not. To be incentive-compatible Fender should charge _____ for the American Standard and _____ for the American Deluxe.
A) $800; $1,599
B) $900; $1,001
C) $999; $1,499
D) $1,119; $1,750

Question

Use the following to answer question:
Table 10.3 
-(Table 10.3) Suppose that Fender is trying to practice indirect price discrimination through versioning. It plans to offer the cheaper American Standard version of its guitar for consumers who are highly price-sensitive and the more expensive American Deluxe version to those who are not. To be incentive-compatible Fender should charge _____ for the American Standard and _____ for the American Deluxe.
A) $800; $1,599 
B) $900; $1,001 
C) $999; $1,499 
D) $1,119; $1,750

Quizplus · Accepted Answer

According to Table 10.3, the marginal cost of producing the American Standard version is $500 and the marginal cost of producing the American Deluxe version is $800. To price discriminate through versioning, Fender should charge the higher price to consumers who are willing to pay for the extra features of the American Deluxe version. To be incentive-compatible, Fender should charge the American Standard version slightly above the marginal cost, so that price-sensitive consumers will choose it over the American Deluxe version. Therefore, charging $999 for the American Standard version and $1,499 for the American Deluxe version would be the best choice for Fender.

Use the Following to Answer Question