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Managerial Economics

Case analysis Cambridge Software


Corporation
BM - Term I 2015-16
Session 9 and 13

Sumit Sarkar, XLRI


Jamshedpur

Pricing Modeler for


Cambridge Software Corporation

Sumit Sarkar, XLRI

If CSC offers only one version of Modeler, which


version should it offer?
At what price?

Sumit Sarkar, XLRI

Demand function for Industrial


(No substitutes case)
P
2500
2000

600
300
100
5000
7000
Sumit Sarkar, XLRI

27000

42000

542000

Demand function for Commercial


(No substitutes case)
P

1200
1000

300
225
60
5000
7000
Sumit Sarkar, XLRI

27000

42000

542000

Demand function for Student


(No substitutes case)
P

200
175
150
100
50
20000
Sumit Sarkar, XLRI

35000
42000
40000

542000

Pointers

What are the possible prices for each version?


Revisit the demand functions

What is CSCs objective?


Profit maximization

Sumit Sarkar, XLRI

CSC Single version case

What is the profit maximizing price for Student?


Calculate profits for each possible prices?
Similarly find the profit maximizing price for
Commercial and Industrial.

Which one is the optimal version?


One with the maximum profit.

Sumit Sarkar, XLRI

CSC Solution to single version case

If CSC offers only one version of Modeler, which


version should it offer?
At what price?

If CSC offers one version, it should offer Industrial


at $600

Sumit Sarkar, XLRI

Multiple versions?

Should CSC offer multiple versions?

If CSC decides to offer multiple versions, which are the


versions that it should offer?

At what prices?

If CSC decides to offer multiple versions, should it offer 2


versions or all 3?

If CSC decides to offer two versions, which are the


versions that it should offer?

Sumit Sarkar, XLRI

Situational analysis

Suppose CSC offers Student at $50.


What are the alternative prices for the other
version(s)?

Sumit Sarkar, XLRI

Consumers surplus from Student


(Price $50)
P

200
175
150
100
50
20000
Sumit Sarkar, XLRI

35000
42000
40000

542000

Large
Multidivisio
nal Corp

Corp R&D
and Univ.
labs

Consultants
and
Professiona
ls

Small
businesse
s

CS from
Student

$100

$50

$150

$125

Max.
Willingness
to Pay for
Industrial

$2400

$1950

$450

$175

Max.
Willingness
to Pay for
Commercial

$1100

$950

$150

$100

Sumit Sarkar, XLRI

Shift of demand function for Industrial


(When Student is available at $50)
P
2500

2400

2000

1950

600

450

300

175

100

5000
7000
Sumit Sarkar, XLRI

27000

42000

542000

Shift of demand function for Commercial


(When Student is available at $50)
P

1200
1100
950 1000

300
225
150 60
5000
7000
Sumit Sarkar, XLRI

27000

42000

542000

Multiple versions - Pointers

To cover the entire market, Student version must be released,


and it should be priced at $50.
If Student version is released at $50, and Industrial version is
also released, what should be the price?
$1950.

If Student version is released at $50, and Commercial version


is also released, what should be the price?
$950.

If only one other version is released along with Student (priced


at $50), which version should be released?

Sumit Sarkar, XLRI

Multiple versions - Conclusions

If only one other version is released along with Student (priced


at $50), it should be Industrial at $1950, as profit is more.
CSC will sell the Industrial version to the segments Large
Multi-divisional Corporations and Corporate R&D and
University Labs.
CSC will sell the Student version to other segments.
When Industrial and Student versions are released, priced at
$1950 and $50 respectively, Commercial version should not be
released, as it will drastically reduce the WtP for Industrial.

Sumit Sarkar, XLRI

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