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Suppose Cyberdyne Systems creates a Professional version of its machine learning software. By disabling some of the features in the Professional...
Suppose Cyberdyne Systems creates a Professional version of its machine learning software. By disabling some of the features in the Professional version it can create a Home version. Both versions have zero marginal cost. Cyberdyne Systems faces two customer segments each interested in buying at most one version. The reservation prices (RPs) of each segments for each version are displayed below.
Professional Version Home Version Segment Size
Business $100 $0 20
Home Buyers $20 $5 80
Each customer will choose the software that gives her the highest surplus.
1. If Cyberdyne Systems offers only the Professional version, what price should it charge in order to maximize revenue?
2. If it offers both versions, what prices should it set to maximize revenue.
3. Now suppose that instead of valuing the Home version at $0, each Business buyer values the Home version at $80. Keep all other RPs the same as before. Show that at the prices you chose in (2), Business buyers would actually prefer to buy the Home version instead of the Professional version. Is this better or worse for Cyberdyne Systems than the single-product strategy identified in (1)?
4. Assume Business buyers value the products as in part (3). Keep the Home version at the same price as in part (2), but lowering the price of Professional version until the Business buyers will be willing to buy the Professional version instead of the Home version. What pair of prices will Cyberdyne Systems now be charging? What profits will it make? Is this better or worse for the company than the single-product strategy described in (1)?