Question

Base Case Situation: A perfectly commonplace median widget available in the market from Acme Manufacturing retails for $125 and costs $99.50 to manufacture. You the customer would willingly pay $150.00 for this widget.

(A)Pinnacle is a Benefit Leader with cost parity ($ 99.50); what will be their choice of prices (range) to

1.Follow a “share strategy” and

2.Follow a “share strategy” and

(B)Nadir & Sons is a Cost Leader offering widgets that cost $87.5 to manufacture; what will be his choice of prices (range) if they decide to:

1.pursue a “share strategy”

2.pursue a "margin strategy"

Answer 1

A.1. (Share Strategy) If Pinnacle is benefit leader with the given cost parity, they will try to maximize benefit (revenue) corresponding to prices that at least cover its cost and leave the customer indifferent to by from it or some other manufacturer. Therefore, the cost of production is given as $99.50 and its its competiter price is $125. Therefore the firm will maximize its benefit when it charge prices between $99.50<price <$125 (open inequality).

A.2. (Margin Strategy) In margin strategy, a firm maximize its profit irrespective of its share in the market. It wil maximize its profit when the difference between revenue and cost is maximum or marginal revene is equal to marginal cost. Further the price is charged in such a way that all consumer surplus is converted into profit. Since the cost of production is $99.50 and consumer on the other hand are willing to pay $150, therefore the price range will be $99.50<price<$150.

B.!. Similarly, (Share Strategy) If N&S is cost leader with the given cost parity, they will try to maximize benefit (revenue) corresponding to cost of other firm and market price. The cost of production is given as $99.50 and its competiter selling price is $125, therefore the firm will maximize its benefit when it charge prices between $99.50<price <$125 (open inequality).

B.2. If it follows Margin Strategy, the firm will maximize its profit irrespective of its share in the market. It will maximize its profit when the difference between revenue and cost is maximum or marginal revene is equal to marginal cost. Or the price is charged in such a way that all consumer surplus is converted into profit. Since the cost of production is $$87.5 and consumer on the other hand are willing to pay $150, therefore the profitable price will range between $87.5<price<$150. But it will attract all the customers in the market if it charge price between $87.5<price<$99.50.