Price Quotes and Pricing Decisions Applied Problems
MARKET STRUCTURES AND PRICING DECISIONS APPLIED PROBLEMS 4
Price Quotes and PricingDecisions Applied Problems
BUS640: Managerial Economics
February 2, 2015
PriceQuotes and Pricing Decisions Applied ProblemsPleasecomplete the following two applied problems:Problem1:JessicaAlba, a famous actress, starts the baby and family products business,The Honest Company, with Christopher Gavigan. Alba and Gavigan set uptheir site so families can choose what kinds of non-toxic,all-natural products they`d like to use and get them in a bundle.Families can choose all kinds of products from food to hygienenecessities and cleaning supplies. Suppose they are thinking ofexpanding their business into five domestic markets: Phoenix, Dallas,Chicago, New York, and Atlanta. Assume their primary goal of businessis to maximize economic profits, although they want to do businesshonestly.Show all your calculations and process. Describeyour answer for each question in three- to five-complete sentences.
a.Youare a business adviser for Alba and Gavigan. Describe a skimmingprice and a penetration price, and advise them whether they shouldcharge a skimming price or a penetration price, with supportivereasoning for and against each pricing alternative.
Price skimming involves changingrelatively a high price for commodities immediately the businessopens up or introduces a new product just like Jessica is planning todo. The objective of this is that the customers are willing to pay ahigh price for a new product sooner. As demand for the product fallsdue to competitors entry with substitutes product the prices fallsalso.
Price penetration on the otherhand, is a strategy of introducing a new product at a cheaper priceand conducting thorough promotion for the product to capture a largemarket before competitors come in (Pride & Ferrell, 2006).This is common for new products that customer are not aware of. Between the two strategies it is hard to recommend one for Jessicabased on the information provided about her skimming might work wellfor her in the new joint but for the long run price penetration seemslike the best option (Ferrell & Hartline. 2011).This is because she will not only create awareness but also promoteher products thus attracting most customer which she will retain.
Are they likely to make economic profits initially? Can they continue to make economic profits in the long term? Why or why not? Discuss.
Dependingon the pricing strategy decided Jessica can either make a profit orrun at a loss for the first few months she opens up her business. However in the long run be it penetration or skimming price strategyshe will still make profit because customer will have familiarizedwith her products.
What advice would you give to Alba and Gavigan to help them make more profit in the long term?
Iwould advise them to conduct thorough campaign to ensure customerawareness of the product.
Problem2:Youoperate your own small building company and have decided to bid on agovernment contract to build a pedestrian walkway in a national parkduring the coming winter. The walkway is to be of standard governmentdesign and should involve no unexpected costs. Your present capacityutilization rate is moderate and allows sufficient scope tounderstand this contract, if you win it. You calculate yourincremental costs to be $268,000 and your fully allocated costs to be$440,000. Your usual practice is to add between 60% and 80% to yourincremental costs, depending on capacity utilization rate and otherfactors. You expect three other firms to also bid on this contract,and you have assembled the following competitor intelligence aboutthose companies.Showall of your calculations and processes. Describe your answers inthree- to five-complete sentences.
What price would you bid if you must win the project?
$440,000 is the fixed price
268,000 is the incremental cost
60%of the incremental cost is the lowest to be added to the incrementalcost
Thereason for placing this price for the bid is because of theadvantages the competitors might have over my company. This bid isfair because it is slightly below the bind placed by the competitorsand leaves a good profit for me.
What price would you bid if you want to maximize the expected value of the contribution from this contract?
Atthis bid am sure that not only will I afford to buy quality productsfor working with but also hire qualified personnel to carry out task.
Defend your answers with discussion, making any assumptions you feel are reasonable and/or are supported by the information provided.
Whenplacing a bid for a contract the contractor always consider the costthe entire project will incur and estimate the likely charges as heprogresses to finish the project (Parvey & Alston.2008).My first bid is made with consideration of my competitors and theirlikely offer. Thus I placed the minimum possible bid. My second bidestimate is made with expectations that I will win the contract nomatter what quotation I place. Thus I placed the bid at $922, 4000which is the fairest price I can charge for the contract.
Ferrell, O. C., & Hartline, M. D. (2011). Marketing strategy.Australia: South-Western Cengage Learning.
Pride, W. M., & Ferrell, O. C. (2006). Marketing: Concepts andstrategies. Boston: Houghton Mifflin Co.