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    The Economics of Product Variety

    Uploaded by

    Ralph Adaimy
    This document discusses the economics of product variety and pricing decisions. It analyzes data on customer segments, market size, willingness to pay, and competition to determine which products to offer and at what price. Specifically, it examines offering two Pooh Bear toys - the Tao Pooh Bear and the Talk Pooh Bear. It calculates the elasticity and marginal revenue for each product. It finds that both products are elastic but the Tao Pooh Bear is more elastic. It determines that total revenue is maximized when demand is unitary elastic. The document also notes that consumer surplus should be considered to help determine the optimal price points that maximize revenues while satisfying customer willingness to pay.

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    The Economics of Product Variety

    Uploaded by

    Ralph Adaimy
    55 views2 pages
    This document discusses the economics of product variety and pricing decisions. It analyzes data on customer segments, market size, willingness to pay, and competition to determine which products to offer and at what price. Specifically, it examines offering two Pooh Bear toys - the Tao Pooh Bear and the Talk Pooh Bear. It calculates the elasticity and marginal revenue for each product. It finds that both products are elastic but the Tao Pooh Bear is more elastic. It determines that total revenue is maximized when demand is unitary elastic. The document also notes that consumer surplus should be considered to help determine the optimal price points that maximize revenues while satisfying customer willingness to pay.

    Original Description:

    This relates the PoohBear Case to the economic principles of elasticity, and consumer surplus.

    Original Title

    PoohBear

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    This document discusses the economics of product variety and pricing decisions. It analyzes data on customer segments, market size, willingness to pay, and competition to determine which products to offer and at what price. Specifically, it examines offering two Pooh Bear toys - the Tao Pooh Bear and the Talk Pooh Bear. It calculates the elasticity and marginal revenue for each product. It finds that both products are elastic but the Tao Pooh Bear is more elastic. It determines that total revenue is maximized when demand is unitary elastic. The document also notes that consumer surplus should be considered to help determine the optimal price points that maximize revenues while satisfying customer willingness to pay.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    55 views2 pages

    The Economics of Product Variety

    Uploaded by

    Ralph Adaimy
    This document discusses the economics of product variety and pricing decisions. It analyzes data on customer segments, market size, willingness to pay, and competition to determine which products to offer and at what price. Specifically, it examines offering two Pooh Bear toys - the Tao Pooh Bear and the Talk Pooh Bear. It calculates the elasticity and marginal revenue for each product. It finds that both products are elastic but the Tao Pooh Bear is more elastic. It determines that total revenue is maximized when demand is unitary elastic. The document also notes that consumer surplus should be considered to help determine the optimal price points that maximize revenues while satisfying customer willingness to pay.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    The Economics of Product Variety

    Ralph Adaimy

    The essence of "The Economics of Product Variety" case lies in making the correct "economic" decision
    in terms of what product(s) to bring to the market and at what price. To make such a decision, data on
    customer segments, market size (per segment), willingness to pay, complementarities and competition
    is required. The case here is simplified in a sense that it assumes there are only two customer segments,
    and that no competition exists (there are no substitutes for the products). The absence of demand
    shifters makes the case more price-quantity oriented.
    Pricing is at the core of PoohBear's success, and will be a distinguishing factor in the decision making
    process. From the given data, we can clearly identify that both suggested products, sold on their own,
    are elastic; in a sense that as price decreases, revenue will increase (due to the increase in quantity
    sold). Below is a simulation of the elasticity of the Tao Pooh Bear and the Talk Pooh Bear:
    =

    %Quantity
    (100000 300000)/100000
    2
    =
    =
    = ~5
    %Price
    (30 20)/30
    0.33
    | | = ~ >

    %Quantity
    (100000 300000)/100000
    2
    =
    =
    = ~ 1.7
    %Price
    (70 40)/40
    0.75
    | | = ~ . >

    As illustrated above, both products are elastic; however, the Tao PoohBear is much more elastic; i.e:
    much more responsive to a change in the price than the Talk PoohBear.
    Given the elasticities for both products, we can now calculate the marginal revenue at each price point:
    = 1 [

    1+
    1 1.7
    ] = 70 [
    ] = 28.8

    1.7

    = 2 [

    1+
    15
    ] = 30 [
    ] = 24

    = 2 [

    = 1 [

    1+
    1 1.7
    ] = 40 [
    ] = 16.4

    1.7

    1+
    15
    ] = 20 [
    ] = 16

    We notice that the marginal revenue for both products is less than the price for each unit sold in order
    to induce consumers to purchase more. Total revenue is maximized at the point where demand is
    unitary elastic; ie: elasticity is -1
    Another important aspect of the case is the consumer surplus a significant factor that will help in the
    pricing decision of each of the products. The consumer surplus was an indicator that helped us realize

    the price point at which both segments are willing to purchase the corresponding products, and still
    maximize revenues.

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