Pear is also a smartphone manufacturer. They have the ability to produce two types of phone: the 12e and the 12plus. The 12 plus has a better camera, larger screen, and more storage. The marginal cost of the 12e is $100, while the marginal cost of the 12plus is $110.

There are two types of consumer in the market, as described below, which differ in their willingness to pay for the two versions.

		Willingness to pay
Type	Number of customers	12e	12plus
High value customer	100	$400	$800
Low value customer	100	$300	$450

Are we in the presence of a damaged good? Justify your answer.

Supposed that Pear didn’t offer two versions, but only one.

If Pear only offered version 12plus, what would be the profit maximizing pricing strategy: $800 or $450?

If Pear only offered version 12e, what would be the profit maximizing pricing strategy: $400 or $200?

In light of parts a and b, if Pear only offered one version, which one would it offer?

Now consider a versioning strategy whereby Pear produces and market both phones, and priced them to maximize profit.

What is the participation constraint that ensures that the low value customers actually buy the 12e?

What would be the price of the 12e? (label this as Pe).

What is the incentive constraint that ensures that the high value consumers choose the 12plus over the 12e?

What would be the price of the 12plus? (label this as Pp).

What is the total profit of the firm under this versioning strategy? (keep in mind the difference in marginal costs as you calculate this).

Overall, is Pear better off versioning or not? Use the profit calculations from parts 2 and 3 to answer this question.