question archive How should a profit-maximising firm price its products if it thinks that potential customers will underestimate their usage of the product? What if they expect customers to overestimate it? When consumers guess wrong about how much they will use a service, this gives firms an incentive to distort marginal prices and/or product quality to exploit the mistake
How should a profit-maximising firm price its products if it thinks that potential customers will underestimate their usage of the product? What if they expect customers to overestimate it? When consumers guess wrong about how much they will use a service, this gives firms an incentive to distort marginal prices and/or product quality to exploit the mistake
Subject:EconomicsPrice: Bought3
How should a profit-maximising firm price its products if it thinks that potential customers will underestimate their usage of the product? What if they expect customers to overestimate it?
When consumers guess wrong about how much they will use a service, this gives firms an incentive to distort marginal prices and/or product quality to exploit the mistake. If consumers underestimate usage, firms should charge a low up-front cost and a high marginal cost (e.g. many mobile phone contracts). If consumers overestimate usage, firms should charge a high up-front cost and low marginal cost (e.g. gyms).
