After Kellogg you find yourself working for Cox Communications, a cable TV provider,

in its pay-per-view division. Cox has been collecting data on its subscribers for quite

some time, and has offered pay-per-view movies at several price points. Analyzing this

data, you find that pay-per-view customers are remarkably consistent and similar; each

customer is willing to pay $10 for the first movie ordered in a given month, $6 for the

second movie, $2 each for the next three movies they watch that month, and they never

watch more than 5 movies. Your marginal cost of serving a movie to a customer is zero.

a. What price do you recommend per movie?

b. Recalling your days at Kellogg, you conceive of a bold new pricing model: Rather

than sell pay-per-view movies individually at all, you propose that Cox instead offer a

Library Card, allowing unlimited access to its pay-per-view catalog for a month, for

$19. If your model of customer demand is accurate, will your customers buy a

Library Card? Explain.

c. Your boss appreciates your creativity, but is unwilling to embrace such a dramatic

change. She drafts a policy in which customers could purchase your monthly Library

Card for $19, or could continue to purchase movies individually at the price you

found in part (a). Do you foresee any problems with this modification of your

proposal? What price point would you recommend for the Library Card now?