You are the manager of a local coffee shop. There are two types of customers in your market, coffee addicts, and casual drinkers. Because coffee addicts buy large amounts of coffee, they are more willing to shop around for low prices and so, if you charge more than $2 for a medium coffee, which is what your competitor charges, they will not come to you at all. If you charge less than your competitor, they will each buy 8 drinks per week. Each casual drinker’s demand is given by Qc = 9 - 2P Your marginal cost is constant at $0.50
a. Devise a pricing scheme that will allow you to sell to both addicts and casual drinkers and maximize your profits. Show that your pricing scheme is incentive compatible.
b. Do you think that coffee shops do something along these lines?