Pricing Strategy Questions

Learning Goal: I’m working on a marketing question and need an explanation and answer to help me learn.

1. Moon Tech (MT) Inc. produces some innovative high–tech equipment called Yuebing at a variable cost
of $300 per unit. Cha Tech (CT) Inc. produces a precision sensor called Naicha (which is in a different
product category) at a variable cost of $200 per unit. All fixed costs of production are already sunk and
can be assumed to be zero. Neither MT nor CT can price discriminate customers (i.e., no first–degree
or third–degree price discrimination); they both have no direct competitors in the market. Market
research has identified the following three segments of customers for both Yuebing and Naicha: 50
universities, 100 corporations, and 50 R&D centers. Each customer needs at most one Yuebing and at
most one Naicha, i.e., no customer will buy more than one unit of each product. The customer’s
valuations for Yuebing and Naicha in each of the three segments are listed in the table below.

Universities Corporations R&D Centers
Yuebing $800 $2,500 $3,000
Naicha $2,800 $1,500 $1,100
(a) Find MT’s optimal price for Yuebing and the corresponding profit. Find CT’s optimal price for Naicha
and its corresponding profit? (2 points)
(b) Suppose that MT makes CT an offer for its exclusive right to produce Naicha. That is, if CT accepts
the offer, MT will be able to produce Naicha at the cost of $200 per unit and will become the exclusive
seller for Naicha. What is the minimum price that MT needs to pay CT for Naicha’s exclusive right
(i.e., the minimum acceptable offer to CT)? (1 point)After MT acquires the exclusive right to produce
and sell Naicha, how should MT sell Yuebing and Naicha to maximize its total profit, and at what
prices? (6 points) Hint: MT does not have to sell these products only separately. What is the maximum
price that MT is willing to pay CT for the exclusive right to produce Naicha? (1 point)

2. All–Natural Solutions (ANS) discovered that a common Asian plant has leaves that have antibiotic
functions in fowls and are particularly effective in preventing some infections in ducks. To prevent
such infections, duck farms have been adding antibiotics to duck feeds for ten consecutive days when
the ducks are young. ANS’s research shows that by feeding a duck one pack of softgels of processed
shredded leaves of the plants, ducks will not get infections even without using any antibiotics in feeds.
The current antibiotic supplements used in duck feeds create severe side effects that kill 10% of the
ducks. With this innovative ANS herbal solution, the mortality rate of ducks is reduced to 2%. It costs
a duck farm $2 to buy and replace a dead duckling. Each surviving duck will lay an average of 30 dozen
eggs in its lifetime on the farm; each dozen of eggs sells at $0.80 per dozen on the wholesale market.
ANS estimates that, because of its organic antibiotic solution (instead of the current industrial
antibiotics), each surviving duck tends to produce an average of 4 more eggs during its lifetime on the
farm, and that the duck eggs will also sell $0.40 higher per dozen on the wholesale market (since they
can be marketed as “from non–antibiotics–fed ducks”). Assume that the current antibiotic supplements
cost the farmer $0.05 per duck per day. What is the economic value of one pack of the ANS’s softgels
of herbal supplements (relative to the antibiotics treatment)? (10 points)