Framework for Prescriptive Analysis:
1. Define the problem: e.g "How to maximize the profit/revenue ?
2. Define a goal/objective: that's to say, quantify the problem. such as find the best pricing point.
3. Optimization: Find the best action to take.
4. Prescribe the action: translate the result into business language.
MR=MC
Market Structure will also impact the optimization.
Market reaction for price changing : Customer switch to competitors ? Price war by competitor ?
Model 1: the demand curve represents the outcome of multiple customers. And customer will only buy one item or not. Then, the optimal price won't change for maximized profit, because the profit curve didn't change.
Model 2: the demand curve represents for single customer. Customer might purchase more than one product based on the price.
Willingness To Pay (WTP)
Definition: How much (at most) would a consumer pay for an additional item he/she buys, which can be calculated by the additional price for additional item.
Calculating the price that next item can be sold.
We can leverage this nature for price bundling.
Why do we calculate the area of the trapezoid ?
1) Because we consider the bundled product as a single product, then the price (sum of WTP) is equal to the revenue. While the revenue equals to trapezoid area.
2) This is the additional cost that customer would like to pay for the additional item.
For this example in the above picture, the WTP of 8.5 items is the sum of WTP until 8.5, which is 55.53. That's to say, the bundled product of 8.5 items is 55.53. While the unit cost is 1*2=2 (1 is for 0.5 item). So, the profit should be 55.53-8.5*2=38.53.
