Sony ('orp). launched its PlayStation 4 in late 2013. It was introduced at a price point of \(\$ 399\). At the time of introduction, a technology firm performed a tear-down of the PlayStation and estimated its cost of production to be \(\$ 381\). Based on this cost estimate, the tech firm estimated Sony was making \(\$ 18\) per unit sold.

a. Assume that Sony generates more profit on royalties from the games played on PlayStation than on the sales of PlayStation itself. In light of this explanation, is it rational for Sony to sell the PlayStation at a mere \(4.5 \%\) gross profit rate? Explain.

b. How would setting the price of the PlayStation at \(\$ 399\), rather than a price reflecting a higher gross profit rate likely affect (1) early life cycle sales and (2) total life cycle sales of PlayStation 4 ?

c. Is Sony's pricing strategy (i.e, introductory price below production cost) more beneficial if the product's life cycle is long or short? Explain.