Case Study: Managerial Economics

1 Case Study: Managerial Economics MEMO To: Regional Vice President, Tri-State Region From: Pricing manager, Tri-State Region Re: Revenue from EPIX

Upon analysis of the subscription level obtained by the marketing department, the demand function is estimated as Q = 39.05694 - 2.46128PRICE. The price and demand variables are strongly correlated (r = 0.95). The demand function explains 89.6% of demand variability and it is statistically significant, F (1, 19) = 162.889, p < .001. A price increase has the potential to reduce the number of digital video subscribers.

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2 The estimated price elasticity of demand is approximately -1.63, an indication the demand is elastic. The price change affects the revenue generated. Lower prices are likely to lead to higher revenue. The current EPIX channel package costs $9.75 generating a revenue of $146,823, however by reducing the price to $5 the firm can generate maximum revenue of $292,250. The price approximately doubles the revenue which overshadows the doubling cost of licensing fee.

Based on the outcomes obtained we should cut-price as the analysis has shown customers are price sensitive for add-on packages. Cutting prices for all subscribers is not counter-productive as revenue generated rises at a higher rate than licensing fee growth expenditures. Attached is an excel file elaborating on the analysis done with different what-if scenarios.

Thank you Attachment: EpixAnalysis.xls.