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IAI Actuarial Core Principles · Business Economics · Pricing strategies in the financial services sector

A mutual fund house in India sells its equity fund to two segments. Retail investors have demand P = 100 - Q (in rupees per unit fee index) and institutional investors have demand P = 60 - Q. Marginal cost is constant at 20 and the firm can charge each segment a different price. Which pair of prices maximises profit?

The profit-maximising prices are 60 for retail and 40 for institutional investors. Equating marginal revenue to the marginal cost of 20 in each segment gives quantities of 40 and 20 respectively, and the demand curves then give these prices.

  1. ARetail 60, institutional 40Correct
  2. BRetail 50, institutional 40
  3. CRetail 60, institutional 30
  4. DRetail 70, institutional 40
  5. Retail 80, institutional 60

Explanation

Set MR = MC in each segment. Retail: MR = 100 - 2Q = 20 gives Q = 40 and P = 60. Institutional: MR = 60 - 2Q = 20 gives Q = 20 and P = 40. The higher price goes to the segment with the less elastic demand at the optimum, retail. Check: at retail P = 60 elasticity is 1.5, institutional at 40 is 2.

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