ECOM 152 Practical Asset Pricing 2020
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ECOM 152 Practical Asset Pricing
2020
Question 1
Travelers can download 1,000 Experiences from Lonely Planet ($10), a graphically rich look at a wide variety of trips. Lonely Planet cuts the price for its app in half after a few days, which is a telling development. iPad developers started with prices that were often much higher than iPhone versions of the same software, based on logic that no one has yet unearthed.
As competition builds in the App Store, that logic should fade quickly. Six weeks after the launch of the iPad:
• 1 million iPads and 85 million iPhone devices had been sold in total
• There were 196,000 iPhone applications and 5,700 native iPad applications
People can use iPhone applications on their iPads but the resolution is not as good as an iPad application. Both iPhone and iPad applications are displayed in the application store in order of their popularity, so that the most popular application is always the first one that any customer sees.
The Table below reports data of the first 6 weeks after the launch of the
iPad, for an application that allows users to access information and reviews about restaurants in cities across the US on their iPad and iPhone.
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Figure 1
a) Calculate the price elasticity for both the iPad application and the iPhone application.
[5 marks]
b) How would you explain the difference between the elasticity for the iPad and the iPhone application?
[5 marks]
“Continues on next page”
c) Do you agree with the New York Times when it says that the decision to price iPad applications higher than iPhone applications was "based on logic that no one has yet unearthed"? Why or why not?
[5 marks]
d) Calculate the price elasticity of the iPad application in weeks 1-3 and then again in weeks 4-6. How would you explain the difference, if any? You are welcome to list multiple explanations.
[15 marks]
Question 2
StableServer Inc. has developed a very stable server. StableServer has a probability of crash over one year of 1% while its competitor of 20% over the same period. StableServer has an operating cost/hour of $15; the competitor is cheaper and requires only $10. If the system crashes this issue will cost your company $100,000. You are planning to use this server for 2,500 hours. StableServer's price is $75,000. What is the EVC for StableServer?
a) Define and discuss the concept of Economic Value to a Customer.
[5 marks]
b) What is the differentiation value of the company ABC? Define.
[5 marks]
c) Explain the situations in which you can set the prices close to ECV?
[10 marks]
d) Explain the situations in which you can set the prices well to ECV?
[10 marks]
Question 3
Identify a real-world company who could profit from an overhaul of their pricing strategy. Be prepared to embrace sectors that until now have not thought thoroughly hard and strategically about pricing (for example, consultants, lawyers, health providers, massage therapists, tax experts etc.).
Think about how you would revolutionize pricing in this industry using the techniques covered during the lectures.
“Continues on next page”
Prepare a short report designed to persuade the Chief Marketing Officer/Chief Financial Officer in that industry of how this pricing strategy will revolutionize their profit model.
[40 marks]
2022-04-22