Question

Table 10.3

Consumer Valuations for Two Versions of Fender Stratocaster Guitars
ConsumerType
Price-sensitive Price-insensitive
AmericanStandardStratocaster AmericanDeluxeStratocaster
$1,100 $1,250 1,200 1,800

(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

Answer 1

The correct answer is option C, with the American Standard Stratocaster priced at $999 to appeal to price-sensitive consumers and the American Deluxe Stratocaster priced at $1,499 for price-insensitive consumers, aligning with their valuations for a profitable indirect price discrimination strategy.

Step-by-step explanation:

The correct answer is option C) $999 for the American Standard and $1,499 for the American Deluxe. In this scenario, Fender is practicing indirect price discrimination through versioning by offering two different versions of Stratocaster guitars to two types of consumers: price-sensitive and price-insensitive.

An incentive-compatible pricing scheme ensures that each type of consumer chooses the product version intended for them based on their willingness to pay. The American Standard Stratocaster should be priced at $999 so it is attractive to the price-sensitive consumers who value it at $1,100, without going so low that it undermines profits.

The American Deluxe Stratocaster should be priced at $1,499, which is below the price-insensitive consumer's valuation of $1,800, ensuring that they prefer the Deluxe version over the Standard one, again without sacrificing profitability. Both prices are set to ensure that consumers self-select into the product version that corresponds with their valuations.