BUSN 4200 Pricing Games Case Assignment Questions

BUSN 4200 Pricing Games Case Assignment Questions

Pricing Games: Sony PlayStation and Microsoft Xbox

Pricing Games Case Questions:

 

• You really need to look at exhibits 1, 2 and 3.

• Given the information would you predict that Sony or Microsoft would want to reduce console prices by $100. Use a 2 by 2 shot simultaneous game to analyze this situation. Assume Nintendo is just looking in but does not act.

• Assume that demand curves are all linear. Calculate the own price point elasticities of demand implied by the data at prices of $299 and $399 for both Sony and Microsoft. Are your answers consistent with your understanding of short run profit maximization for firms with market power?

• Can you think of reasons why these firms would be particularly aggressive in pricing their consoles?

 

You will be asked to complete a 2 X 2 matrix otherwise known as a payoff table. Here’s what it looks like. You have 3 more items to fill in.

		MICROSOFT
		$399	$299
SONY	$399	1 – $1032.5, $960	3
	$299	2	4

BUSN 4200 Pricing Games Case Assignment Questions

Each of 1-2-3-4 above grid should have 2 numbers:

1 – Profit SONY, Profit Microsoft when both $399 per unit

2. Profit SONY when SONY $299 AND Microsoft $399; Profit MICROSOFT when MICROSOFT $399 and Sony $299
3. Profit SONY when SONY $399 and Microsoft $299
4. Profit MICROSOFT when MICROSOFT $299 and Sony $299

You fill in the matrix above, for Sony Playstation 3 at $399 when MicrosoftXbox 360 is $399 and when it is $299/

You do the same when Sony is $299 and Microsoft is $399 and $299.

Put these numbers in the matrix above. This is a payoff table. And the strategy is known as Prison’s Dilemma, because the decision Sony makes are contrained by Microsoft’s decisions and vice versa.

You need Exhibit 1 to see what the projected numbers sold are based on price.

You need Exhibit 2 to figure out variable costs per unit

Variable cost =  VC.

Variable Cost = Labor + materials and parts + distributution

Want to know Contribution, which is Price – VC.  AND

Total contribution  = Contribution X Quantity

P = Prce; Q = Quantity

SONY

If P(SONY( = $399 and P(MSFT) = $399, then Q (SONY) = 8.75 (See Exhibit 1)

Variable cost per unit = 80 +161 +40 = $281

Variable Cost = Labor + materials and parts + distribution

Contribution/unit = 399 -281 = $118

Total contribution = 118 X 8.75 = $1032.5

MICROSOFT

If P(Sony) + P(MSFT) = $399 then

Q (MSFT) = 8.0 (See Exibit 1)

Variable Cost = 62+167+50 = $279

Contribution/unit = 399-279 = 120

Total contribution = 120 X 8 = $960

You can see now how to derive the 2 numbers that belong in fields 2,3,4.

If you are SONY where do you make the most money?

If you are MSFT where do you make the most money?

Is there a point where both must compromise to make more money than they would lose

BUSN 4200 Pricing Games Case Assignment Questions

Whether Microsoft’s price is $399 or $299 Sony’s demand curve is the same, parallel sloping down at -0.3. Where did that come from? See below
SONY: 11.75 – 8.75/299-399 = -0.3 (Microsoft price 11.75, Sony at 8.75)

11.25 – 8.25/299-399 = -0.3   (Microsoft price at 11.25, Sony as 8.25)

SONY ELASTICITIES OF DEMAND:
-0.3* $399/8.75 = -13.68
-0.3* $399/8.25= -14.509
-0.3*$299/11.75=-7.634
-0.3*$299/11.25=-7.974
Can you do Microsoft’s elasticity of demand yourself? (-0.045 *  ?)

BUSN 4200 Pricing Games Case Assignment Questions

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