Question: Optimal Pricing

Your software company has just completed the first version of SpokenWord, a voice-activated word processor. As marketing manager, you have to decide on the pricing of the new software. You commissioned a study to determine the potential demand for SpokenWord. From this study, you know that there are essentially two market segments of equal size, professionals and students (one million each). Professionals would be willing to pay up to $400 and students up to $100 for the full version of the software.

A substantially scaled-down version of the software would be worth $50 to students and would be worthless to professionals. It is equally costly to sell any version. In fact, other than the initial development costs, production costs are zero.

1. What are the optimal prices for each version of the software?
   Now suppose that, instead of the scaled-down version, the firm sells an intermediate version that is valued at $200 by professionals and $75 by students.
2. What are the optimal prices for each version of the software? Is the firm better off by selling the intermediate version instead of the scaled-down version?

Price: $2.99

Solution: The downloadable solution consists of 1 pages
Deliverable: Word Document