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Organizational Economics

Follow the APA style of writing with in-text citations and a reference list if necessary. (250+ words X 13)

Forecasting New Products and Services

Forecasting provides very useful projections for established products and services, but newly introduced products and services have wildly different success results. Name and discuss at least one product and one service that exploded with exponential increase in demand shortly after their introduction. What about products and services (2 products) that have largely been ignored?

Managerial Challenge

Survey and opinion polling are another forecasting tool that may be helpful in making short-period forecast. The greatest value of survey and opinion polling techniques are that they help to uncover if consumer tastes are changing or if business executives begin to lose confidence in the economy to maximize their wealth. Assignment:
(1) Research your favorite consumer product (iPhone, Coca Cola, Sony PlayStation, Gucci, Lego, Frito Lay Cheetos, etc.) for changes in trend (trend analysis)
(2) Develop a survey-opinion poll to determine if there should be a new product introduced. The questions in your survey-opinion poll should be designed to capture if the current users of the product are unsatisfied or completely satisfied with the product. This information will help you determine as the manager if you will introduce a new product.

(a) The survey must be at least 15 questions.
(b) The survey must have a reference list at the end for each article you researched to gather data on your favorite product.
(c) You must include a statement for your final opinion – introduce a new product or not.

Production Economics

“Boeing’s Secret” (to retrieve and view this article your NEC student identification number is needed, copy and paste the link into your web browser)

http://nec.gmilcs.org/login?url=http://search.ebscohost.com/login.aspx?direct=true&AuthType=cookie,ip,url,cpid&custid=danforth&db=buh&AN=6645142&site=ehost-live&scope=site

How a Boeing 787 Dreamliner is built? –

After reading the article “Boeing’s Secret” and watching the video “How a Boeing 787 Dreamliner is Built,” discuss if you believe Boeing is labor intensive, capital intensive, or both. Has Boeing established the “network effect” for their product?

Cost Analysis

When materials are stored in inventory for a period of time before being used in the production process, the accounting cost and economic cost differ if the market price of these materials have changed from the original purchase price. Accounting cost is equal to the actual acquisition cost and economic cost is equal to the current replacement cost. After reading the articles “U.S. Car Business in Major Shift” and “Car Making in America”, which cost do you feel the U.S. Car industry (GM, Ford, etc.) is most affected by – accounting or economic cost?

Managerial Challenge

US Airways owns a piece of land near the Pittsburgh International Airport. The land originally cost US Airways $375,000. The airline is considering building a new training center on this land. US Airways determined that the proposal to build the new training center is acceptable if the original cost of the land is used in the analysis, but the proposal does not meet the airline’s project acceptance criteria if the land cost is above $850,000. A developer recently offered US Airways $2.5 million for the land. Should US Airways build the training center at this location? (Chapter 8 pg. 302 Exercise 1)

Cost Theory

After reading the article “Adding Value in Nike’s Production Line (

https://rctom.hbs.org/submission/adding-value-in-nikes-production-line/

),” research your favorite brand of shoes (Nike, Adidas, New Balance, etc.) and answer the following questions: Has the company experienced declining or increased cost attributed to computerization? Was variable cost increased or decreased? Were fixed cost increased or decreased.

Product Differentiation

Product differentiation is a strategy that relies on differences in products or processes affecting perceived customer value. For this discussion forum, define the product difference between two similar yet competitive brands (e.g. Coca-Cola and Pepsi, Kleenex and Puffs, Heinz Ketchup and Hunts Ketchup). Discuss what makes your product choice different to include product image, price premium, technology, and generic brands.

Regulated Monopoly

Research an organization or brand that you feel is a monopoly. Discuss the organization or brand giving your classmates a view details about why you feel it is a monopoly and determine if the monopoly is a regulated natural monopoly and why?

Managerial Challenge

After reading the section titled “Dominant Microprocessor Company Intel Adapts to Next Trend” (Chapter 11 pg. 384-385) and the article titled “2018-2019 Intel Corporate Responsibility Report: Creating Value through Transparency, (

https://newsroom.intel.com/editorials/2018-19-intel-corporate-responsibility-report/#gs.gn9ttl

)” complete a list of reasons how a single firm like Intel comes to dominate some markets.

Oligopolistic Industries

An oligopoly is characterized by a relatively small number of firms offering a similar product or service. Oligopoly products may be branded, as in soft drinks, cereals, and athletic shoes, or unbranded, as in crude oil, aluminum, and cement. The main distinction of oligopoly is that the number of firms is small enough that actions by any individual firm on price, output, product style, quality, introduction of new models, and terms of sale has an impact on the sales of other firms in the industry. Review the Table 12.1 (pg. 416, attached below), select a dominant single firm, duopoly firm, and triopoly firm and discuss if you foresee any weaknesses in the three firms you selected that would allow entrance into this market or if one of the firm has enough strength to become a monopoly?

Price Skimming

Price skimming strategy is a new product strategy that results in a high initial product price being reduced over time as demand at the higher price is satisfied. Research product or service that may have entered the market with a high initial price and now the demand at the higher price is satisfied. Discuss why you believe consumer demand has changed for this product or service which resulted in satisfaction of the market.

Antitrust Regulation

Antitrust regulation is designed to increase competition by eliminating attempts to monopolize an industry (other than through better products or better management) as well as by attacking certain patterns of illegal conduct (i.e. price fixing and exclusionary contracts that foreclose competitor business). For this forum, discuss your belief on “tech giants” violating antitrust laws. Do you feel Facebook, Google, Amazon, Apple, Microsoft etc. are in violation of such antitrust regulation?

Capital Expenditure Decisions

Mergers and acquisitions are capital budgeting techniques. This technique is a managerial expansion decision to increase assets drawing a cash benefit. Research a most recent merger or acquisition and discuss the firm (merger – stable firm / acquisition – purchasing firm) expected cash benefit. Pretend you are the owner; would you make the same decision? Why or Why Not?

Managerial Economics
Applications, Strategies and Tactics,

James R. McGuigan

R. Charles Moyer

Frederick H. deB. Harris

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PART IV – PRICING & OUTPUT DECISIONS:
STRATEGY AND TACTICS
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Chapter 11 –
Price and Output Determination:
Monopoly and Dominant Firms

Chapter 11 – Price & Output Determination: Monopoly and Dominant Firms Overview (1 of 1)
MONOPOLY DEFINED
SOURCES OF MARKET POWER FOR A MONOPOLIST
PRICE AND OUTPUT DETERMINATION FOR A MONOPOLIST
THE OPTIMAL MARKUP, CONTRIBUTION MARGIN, AND CONTRIBUTION MARGIN PERCENTAGE
REGULATED MONOPOLIES
THE ECONOMIC RATIONALE FOR REGULATION

Ch 11 – Monopoly Defined
(1 of 1)
Monopoly is defined as a market structure with significant barriers to entry in which a single firm produces a highly differentiated product
Without any close substitutes for the product, the demand curve for a monopolist is often an entire relevant market demand
Just as purely competitive market structures are rare, so too pure monopoly markets are rare

Ch 11 – Sources of Market Power for a Monopolist
(1 of 1)
Monopolist or near-monopoly dominant firms enjoy several sources of market power
A firm may possess a patent or copyright that prevents others from producing the same product
A firm may control critical resources
A third source may be a government-authorized franchise
Monopoly power also happens in natural monopolies because of significant economies of scale over a wide range of output

Ch 11 – Sources of Market Power for a Monopolist
Increasing Returns from Network Effects (1 of 2)
These can also be a source of monopoly market power
Marketing and promotions are generally subject to diminishing returns; See Figure 11.1; example: Microsoft and Apple
Sales penetration curve – An S-shaped curve relating current market share to the probability of adoption by the next garget customer, reflecting the presence of increasing returns
By achieving more than 30% acceptance in the marketplace, the technology becomes the industry standard
Achieving greater than 30% share, leads to increasing returns in marketing caused by a network effect that displaces other competitors

Figure 11.1 How the Adoption of a Technology Leads to Increasing Returns
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Ch 11 – Sources of Market Power for a Monopolist
Increasing Returns from Network Effects (2 of 2)
But monopoly is seldom assured for 3 reasons:
First, a higher price point for innovative new products can offset cost savings from increasing returns of a competitor (Example: Apple)
Second network effects tend to occur in technology-based industries that have experienced falling input prices; Figure 11.2
Third, technology products whose primary value lies in their intellectual property have revenue sources dependent on renewals of governmental licensures and product standards
Firms try to get around the inflection point of Figure 11.1 and achieve increasing returns by free trials for a limited time, or giving the technology away if it can be bundled with other revenue-generating product offerings

Figure 11.2 How Declining Component Costs Led to Falling Product Prices in the Computer and Telecom Industries
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What Went Right? ● What Went Wrong?
What Went Right at Microsoft but Wrong at Apple Computer
Historically, Apple Computer hovered at 7-10% market share in the U.S. personal computer industry, never coming close to the 30% inflection point for declining selling costs (See Fig 11.1).
Apple attempted to become an industry standard in several PC submarkets, like desktop publishing, journalism, advertising & entertainment.
Also, after defending its GUI code for 2 decades, Apple reversed course, and began licensing agreements with MS & IBM, to achieve the widespread adoption of Mac programming; this strategy led to success in smart phones
Although Apple’s GUI code was superior to the original MS code, the superior product lost to the product that first reached increasing returns – MS
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What Went Right? ● What Went Wrong?
Pilot Error at Palm
Despite having 80% of the handheld operating system market and despite producing 60% of the handheld hardware at its peak in 2000, Palm has now lost most of its market share to its rivals.
Palm grew so fast (165% year-over-year sales increases) that it gave little attention to operational issues such as managing the supply of inputs and forecasting demand.
It mistimed the announcement of its m500 product upgrades, which were delayed by supply chain bottlenecks, and Palm’s customers stopped buying older models.
Handspring, Sony, HP, MS’s Pocket PC and Blackberry drove prices lower and offered newer product features
Almost overnight, excess Palm IV and V inventories piled up on shelves; Palm took a $300 million write-down on its inventory losses and its stock price fell from $25 to $2 per share.
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Ch 11 – Price and Output Determination for a Monopolist
Spreadsheet Approach: Profit v. Revenue Maximization… (1 of 1)
Table 11.1 shows the demand projections for daily sales of Polo golf shirts at an outlet store
Sales floor personnel are paid a salary plus commission based on their sales
Such an employee wants the price to continue dropping as long as total sales revenue rises (MR remains positive up to and including 14 shirts/day at $25.79; any fewer shirts, and total revenue would be smaller, reducing commissions
The store manager & parent company are concerned that the 14th shirt imposes a unit operating loss of -$24; (MR in column 4 falls below the variable cost in column 5)
Not until the price is raised and MR is increased back to $28 will operating losses be eliminated

Table 11.1 – Ralph Lauren Polo Golf Shirts (Per Color, Per Store, Per Day)
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Ch 11 – Price and Output Determination for a Monopolist
Graphical Approach (1 of 1)
Figure 11.3 shows the price-output decision for a profit-maximizing monopolist
Just as in pure competition, profit is maximized at the price and output combination where MC = MR
If the demand curve were of the form

Figure 11.3 – The Price and Output Determination of a Pure Monopoly
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Ch 11 – Price and Output Determination for a Monopolist
Algebraic Approach (1 of 3)
Profit Maximization for a Theme Park Restaurant

Ch 11 – Price and Output Determination for a Monopolist
Algebraic Approach (2 of 3)
Profit Maximization for a Theme Park Restaurant (cont.)

Ch 11 – Price and Output Determination for a Monopolist
Algebraic Approach (3 of 3)
Profit Maximization for a Theme Park Restaurant (cont.)

Ch 11 – Price and Output Determination for a Monopolist
The Importance of the Price Elasticity of Demand (1 of 2)

Ch 11 – The Optimal Markup, Contribution Margin, & Contribution Margin Percentage
(1 of 1)

Value proposition – A statement of the specific source(s) of perceived value, the value driver(s), for customers in a target market
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Table 11.2 – Optimal Prices, Markups, and Margins
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Figure 11.4 – Value Creation in the Strategy Map for Natureview Farms Yogurt
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Ch 11 – The Optimal Markup, Contribution Margin, & Contribution Margin Percentage (1 of 1)
Gross Profit Margins
Gross profit margin – Revenue minus the sum of variable cost plus direct fixed cost, also known as direct costs of goods sold in manufacturing
Components of the Margin
Contribution margins and gross profit margins differ across industries and across firms within the same industry for many reasons
Some industries are more capital intensive than others
Differences in margins reflect differences in advertising, promotion & selling costs
Differences in gross margins arise because of differential overhead in some businesses
Finally, after accounting for any differences in the indirect fixed costs of capital equipment, advertising, selling expenses and overhead, the remaining differences in profit margins reflect differential profitability

Ch 11 – The Optimal Markup, Contribution Margin, & Contribution Margin Percentage (1 of 1)
Monopolists and Capacity Investments
Because monopolists do not face the discipline of strong competition, they tend to install excess capacity or fail to install enough capacity
Even regulated monopolies over or underinvest generating capacity
Limit Pricing
Maximizing short-run profits may not necessarily maximize the long-run profits of the firm
The monopolist firm may decide instead to engage in limit pricing where it charges a lower price to discourage entry into the industry by potential rivals
The firm foregoes some of its short-run monopoly profits in order to sustain its monopoly position

Figure 11.5 – Limit-Pricing Strategy
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Figure 11.6 – The Effect of Pricing Strategies on Profit Streams as a Patent Expires
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Ch 11 – The Optimal Markup, Contribution Margin, & Contribution Margin Percentage (1 of 1)
Using Limit Pricing to Hamper the Sales of Generic Drugs
Patent protection is the key to financial success in the pharmaceutical industry
Rather than limit pricing of BMS’s Capoten, a hypertension drug, BMX maintained the price per pill to the end of the 20 year patent protection
Competition from generics was swift and disastrously effective
In contrast, Eli Lilly chose limit pricing & advertising for Prozac and Claritin
Smaller margins and a slower decline of market share could achieve higher profitability over a longer period

Ch 11 – Regulated Monopolies
(1 of 1)
Several important industries in the U.S. operate as regulated monopolies, including electric power companies, natural gas companies and communications companies
Public utilities – A group of firms, mostly in the electric power, natural gas, and communications industries, that are closely regulated by one or more government agencies. The agencies control entry into the business, set prices, establish product quality standards, and influence these total profits that may be earned by the firms subject to scale economies

Ch 11 – Regulated Monopolies
Electric Power Companies (1 of 1)
Electric power is made available to the consumer through a production process characterized by 3 stages
Power is generated in generating plants
Power is transmitted from the generating site to the locality where it is used
The power is distributed to individual users
Integrated firms that carry out all 3 stages of production are usually regulated by state public utility commissions
These commissions set the rates to be charged to consumers
The firms normally receive exclusive rights to serve localities through franchisees granted by local governing bodies
As a result, electric power firms have well-defined markets within which they are the sole provider of output
Finally, the FERC has the authority to set rates on power that crosses state lines, and on wholesale power sales

What Went Right? ● What Went Wrong?
The Public Service Company of New Mexico
This firm provides electric power service and natural gas distribution services to most of New Mexico’s population
Although PNM was authorized to earn a return of 12.5% on common equity, it was unable to do so
Faced with high growth in demand, PNM joined other regional utilities in the construction of several large coal-fired plants and a nuclear power plant, but load growth did not materialize as expected
The projects were plagued by cost overruns, delays and costly safety modifications
At completion, PNM found itself with a capacity in excess of 80% of peak demand for which it could not recover
The regulatory process does not ensure that a firm will earn its authorized return
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Ch 11 – Regulated Monopolies
Natural Gas Companies (1 of 1)
This highly regulated industry is also a 3-stage process
Production of the gas in the field
Transportation to the consuming locality through pipelines
Distribution to the final user
FERC historically set the field price of natural gas, but regulation at the wellhead has been effectively phased out
Today, FERC overseas the interstate transportation of gas by approving pipeline routes and by controlling the wholesale rates charged by pipeline firms to distribution firms
The distribution function may be carried out by a private firm or a municipal government agency
In either event, the rates charged to final users are also subject to regulatory control

Ch 11 – The Economic Rationale for Regulation
Natural Monopoly Argument (1 of 1)
Firms operating in the regulated sector are often natural monopolies in which a single supplier emerges because of a production process characterized by massive economies of scale
Natural monopoly – An industry in which maximum economic efficiency is obtained when the firm produces, distributes, and transmits all of the commodity or service produced in that industry. The production of natural monopolists is typically characterized by increasing returns to scale throughout the relevant range of output

Figure 11.7 – The Price-Output Determination of a Natural Monopoly
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Managerial Economics
Applications, Strategies and Tactics,

James R. McGuigan

R. Charles Moyer

Frederick H. deB. Harris

Chapter 12 – Price & Output Determination: Oligopoly Overview (1 of 1)
OLIGOPOLISTIC MARKET STRUCTURES
INTERDEPENDENCIES IN OLIGOPOLISTIC INDUSTRIES
CARTELS AND OTHER FORMS OF COLLUSION
PRICE LEADERSHIP
THE KINKED DEMAND CURVE MODEL
AVOIDING PRICE WARS

Ch 12 – Oligopolistic Market Structures
(1 of 1)
An oligopoly is characterized by a relatively small number of firms offering a similar product or service
Oligopoly products may be branded or unbranded
The number of firms is small enough that actions by any one firm on price, output, etc. have a perceptible impact on the sales of the others
Each firm knows that any new price cut or large promotional campaign is likely to evoke a countermove from its rivals
Rival response expectations are the key to firm-level analysis
If rival firms are expected to match price increases and price cuts, a share-of-the market demand curve may illustrate the sales response to the pricing initiatives of the firm (See Figure 12.1)

Figure 12.1 –
Rival Response Expectations Determine Firm Demand
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Figure 12.2 Browser Market Shares
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Ch 12 – Oligopolistic Market Structures
Oligopoly in the U.S.: Relative Market Shares (1 of 1)
Much of U.S. industry is best classified as oligopolistic in structure with a wide range of industry configurations, (Table 12.1)
At one extreme are dominant single firms in the markets for razors, beer, etc.
In crackers, handsets, etc. two firms dominate
Sales in tires, U.S. auto & truck markets are dispersed across 6-8 firms
Market shares are more dispersed in telecom equipment and pharmaceuticals

Table 12.1 – Largest U.S. Market Shares in Oligopolistic Industries
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Table 12.2 – Market Share Distributions Over Time in Airlines, Cereals, and Wide-Bodied Aircraft
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Figure 12.3 – The Relative Sizes of Competitors in the Auto Rental and Gasoline Industries
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Ch 12 – Interdependencies in Oligopolistic Industries
The Cournot Model (1 of 1)
One standard approach to the interdependency problem among oligopolists is merely to ignore it, for a firm to assume that its competitors will act as if it does not exist
Because of the wide scope of oligopoly industry configurations in Table 12.1, several simplifying models have been used to describe oligopolists’ competitive behavior regarding price, output, etc.
The Cournot oligopoly model asserts that each firm, in determining its profit-maximizing output level assumes that the other firm’s output will not change

Ch 12 – Cartels and Other Forms of Collusion
(1 of 1)
Oligopolists sometimes reduce the inherent risk of being so interdependent by either formally or informally agreeing to cooperate or collude in decision-making; such agreements are called cartels
Cartel – A formal or informal agreement among firms in an oligopolistic industry that influences such issues s prices, total industry output, market shares, and the division of profits
In general, collusive agreements are illegal in the U.S. and Europe, but some exceptions exist
Prices and quotas of some agricultural products are set by grower cooperatives
The IATA airlines flying transoceanic routes jointly set uniform prices for these flights
Ocean shipping rates are set by hundreds of collusive conferences on each major route
Illegal collusive arrangements also arise from time to time

Ch 12 – Cartels and Other Forms of Collusion
Factors Affecting the Likelihood of Successful Collusion (1 of 2)
Number and Size Distribution of Sellers
Collusion is less difficult as the number of firms involved decreases
Product Heterogeneity
Products that are alike are homogenous, and price is the only distinction that matters; for heterogeneous (differentiated) products, cooperation is more difficult
Cost Structures
The more cost functions differ among competing firms, the more difficult it will be
Size and Frequency of Orders
Effective collusion is more likely when orders are small, frequent, and received regularly, as in the purchase of autos

Ch 12 – Cartels and Other Forms of Collusion
Factors Affecting the Likelihood of Successful Collusion (2 of 2)
Threat of Retaliation
An oligopolistic firm will be less tempted to grant secret price concessions to selected customers if it feels that other cartel members would detect those price reductions and then retaliate
Percentage of External Output
Most cartels contain the seeds of their own destruction
rising prices and profits attract the entry of new competitors
any increase in supply from outside the cartel means that larger restrictions on output must be imposed on cartel members in order to sustain price

Ch 12 – Cartels and Other Forms of Collusion
Cartel Profit Maximization and the Allocation of Restricted Output (1 of 1)
Under legal cartels & secret collusive agreements, firms attempt to increase prices and profits above the level that would prevail in the absence of collusion
The profit-maximization solution for a two-firm cartel, E and F, is shown graphically in Figure 12.4
If the cartel maximizes its total profits, the market share (quota)for each firm should be set where marginal cost of all firms is identical and the industry (summed) MC = MR
The central problem for cartels is in monitoring these quotas, detecting violations and effectively enforcing punishments
As a result, most cartels are unstable
The longevity of OPEC and the DeBeers diamond cartels is exceptional

Figure 12.4 –
Price-Output Determination for a Two-Firm Cartel
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Figure 12.5 –
How OPEC III Production Quotas Affected Crude Oil Prices
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Figure 12.6 – Saudi Arabian Crude Oil Production
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Figure 12.7 – Proven Oil Reserves
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Figure 12.8 –
Components of the Price of Gasoline per Gallon (1990-2009)
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Ch 12 – Cartels and Other Forms of Collusion
Cartel Analysis: Algebraic Approach (1 of 3)
The profit-maximizing price and output levels for a two-firm cartel can be determined algebraically when the demand and cost functions are given:

Ch 12 – Cartels and Other Forms of Collusion
Cartel Analysis: Algebraic Approach (2 of 3)

Ch 12 – Cartels and Other Forms of Collusion
Cartel Analysis: Algebraic Approach (3 of 3)

Table 12.3 – Comparisons of Pricing, Output, and Profits for Siemens & Thomson
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Ch 12 – Price Leadership
(1 of 1)
Price leadership – A pricing strategy followed in many oligopolistic industries. One firm normally announces all new price changes. Either by an explicit or by an implicit agreement, other firms in the industry regularly follow the pricing moves of the industry leader
Barometric Price Leadership
One firm announces a change in price that it hopes will be accepted by others
The leader must, however, be reasonably correct in its interpretation of changing demand and cost conditions
The barometric price leader merely initiates a reaction to changing market conditions that other firms find in their best interests to follow

Ch 12 – Price Leadership
Dominant Firm Price Leadership (1 of 1)
One firm establishes itself as the leader because of its larger size, customer loyalty, or lower cost structure in relation to others
The leader may then act as a monopolist in its segment of the market
The incentive for followers to accept the established price may be a fear of cutthroat retaliation from a low-cost dominant firm, or it may be simply a convenience
The price-output solution for the dominant-firm model is shown in Figure 12.9
The dominant firm maximizes its profits by setting price and output where marginal cost equals marginal revenue

Figure 12.9 –
Price-Output Determination for the Dominant Firm
© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
27

Ch 12 – The Kinked Demand Curve Model
(1 of 1)
Sometimes when an oligopolist cuts its prices, competitors quickly feel the decline in their sales, and are forced to match the price reduction
Or, if one firm raises its prices, competitors gain customers by maintaining their original prices, and have little motivation to match a price increase
The demand curve facing an individual oligopolist would be far more elastic for price increases than for price decreases (Figure 12.10)
This model explains why stable prices exist in some oligopolistic industries
But the kinked demand model is incomplete in that it offers no reason why the prevailing price level, rather than some other one, is chosen

Figure 12.10 – The Kinked Demand Curve Model
© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
29

Ch 12 – Avoiding Price Wars
(1 of 1)
To sustain profitability, oligopoly firms must avoid discounting tactics in their high-margin business
The ready-to-eat (RTE) Cereal, beer, camera film, DVD industries & more have experienced classic price wars
Growing the Market
One key to avoiding price wars is to attempt to grow the market
Pepsi cannot hope to get rid of Coke
Each rival must anticipate aggressive discounting designed to attract the other firm’s customers
It is better to maintain high prices and focus on opening new markets

Ch 12 – Avoiding Price Wars
Customer Segmentation with Revenue Management (1 of 1)
If low-cost new entrants attack a major airline, one effective response involves matching prices to a targeted customer segment and controlling how much capacity is released for sale to that segment
“fencing” restrictions such as 7-day advance-purchase requirements, and Saturday night stayovers prove crucial in segmenting the price-sensitive discretionary traveler from the regular business expense account customer
Incumbent carriers can “meet the competition” in these restricted fare classes while reserving sufficient capacity for those who desire to pay for the reliability, convenience, and change-order responsiveness of business-class and full-coach seats
Established competitors can maintain high prices on segments & routes, etc.

Ch 12 – Avoiding Price Wars
Reference Prices and Framing Effects (1 of 1)
Product line extensions can reduce gainshare price discounting by providing reference prices and framing effects that help sell the mid-range product at undiscounted prices
Consumers of unbranded products typically remember the last price they encountered
Branded products, however, trigger much longer reference pricing
Discounting with a major branded item tends to etch in the customer’s mind a new lowball price that can be expected thereafter for months or years’
Therefore, better to introduce a super-premium product offered at price points well above your traditional product; loyal customers will remember

What Went Right? ● What Went Wrong?
Good-Better-Best Product Strategy at Marriott Corp & Kodak
Marriott responded to fierce price competition by introducing upscale, high-quality, mid-range, and down-market product lines to its customers.
Length of stay, proximity to the central business district, and room type effectively segmented Marriott’s customer base
Marriott has no problem getting a substantial price premium for hotel rooms with sitting areas in central business districts & convention hotels
In the late 1990s, Kodak pursued a similar concept with discounted Funtime Film and the Kodak disposable camera
Disposable cameras for everyday use made this film highly accessible
Kodak’s Royal Gold film provided exceptional picture resolution in many lighting conditions, and could memorialize subtleties of expression, at a premium price
33
© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Ch 12 – Avoiding Price Wars
The Role of Innovation (1 of 1)
Rather than matching price cuts, a higher-priced brand can highlight conspicuous product innovations
Sony’s Mavica was an easy-to-use point-and-shoot digital camera that recorded images onto thumb drives, which popped out of the camera and loaded into any PC for easy editing, storing and printing
While competitor Kodak was improving picture resolution to justify expensive and complicated home printer hardware peripherals using Kodak chemicals and paper, Sony simplified the prices and increased customer value.
Mavica earned a premium price relative to its competitors

Figure 12.11 –
Segmented Oligopoly with Extreme Brand Loyalty
© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
35

Ch 12 – Avoiding Price Wars
Matching Price Cuts with Increased Advertising (1 of 1)
Perhaps the best way to avoid a price was is to not start one
If someone else starts a price war, often the best response is simply to match the competition and then accentuate non-price elements of the marketing mix by increasing services or advertising
A final key to avoiding price wars comes through the tactical insights often available from game theory analysis:
Being able to identify a rival’s payoffs using competitor surveillance helps predict the competitor’s response to one’s own price cuts
In other circumstances, cooperative high-price outcomes may arise out of mutual interest
Recognizing the detailed structure of the pricing “game” can be a first step in altering the competitive environment

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