2. Consider the following couponing strategy for Kellogg's Oat Bunches cereal. Suppose there are two types of consumers - the busy professionals (B) and the stay-at-home parents (S). Btype consumers are willing to pay $6 for a box of Kellogg's cereals while the S-type consumers are willing to pay $2.50 for a box of cereals. But B-type consumers face a time/inconvenience cost of $3 of redeeming coupons while the S-type consumers face no redeeming costs. Assume that there are 10 consumers of each type and marginal costs are negligible. (a) What should be Kellogg's regular price and couponed price for Oat Bunches if the coupons have been sent out to all consumers and Kellogg's goal is to implement price discrimination across the two types of consumers? What is Kellogg's profit in this case? Show that its profit from couponing is higher than its profit if it didn't offer these coupons. (b) Explain in words why your results in (a) depends on the fact that the B-type consumers face an inconvenience of redeeming coupons cost that is sufficiently higher than that for the S-type consumers. Confirm this with the following example: Imagine that Kellogg makes it convenient to redeem coupons for B-type consumers. Suppose their time/inconvenience cost is only $1 now. Show that Kellogg's profit is lower than what you obtained in (a) above.

(c) Suppose it now possesses a technology using which it can target coupons to a specific segment. Which segment should it target? What should be Kellogg's regular price and couponed price for Oat Bunches and its profit in this case.

answer c only