Reference no: EM13891291

Suppose you are a firm facing a market which has changed in its composition since the last time you set prices. There are two market segments: X and Y, with reservations prices $20 and $10, respectively, for a unit of your product. The purchase frequency is 1 unit every quarter. Your variable costs are $2/unit. You sell through a large retailer whose fixed costs of doing business with you are $25/quarter. 

Until last month your market consisted of 50 people with the $20 reservation price and 50 people with the $10 reservation price, and your price to the retailer was $19.50. But now you realize that there are only 20 potential consumers with the $20 reservation price, the other 80 having a reservation price of $10.

There are three possible options you can pursue at this point: (a) offer a trade discount to the retailer (with the amount of the discount to be determined); (b) don't change the wholesale price from its original value, but offer a coupon to consumers as a free-standing insert in the local newspaper (the coupon value is to be determined; the coupon will have a limited expiry date and it will cost segment X - and only segment X - $4 to redeem; the coupon redemption cost isn't revenue for the firm nor the retailer); (c) offer a coupon to consumers and offer a trade promotion to the retailer (both the coupon value and the trade deal will have to be determined).

Which option should the firm pursue?  Please explain why and show your analysis.