BUS 640 Managerial Economics
Price Quotes and Pricing Decisions Applied Problems
Please complete the following two applied problems: Problem 1: Jessica Alba, a famous actress, starts the baby and family products business, The Honest Company, with Christopher Gavigan. Alba and Gavigan set up their 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 hygiene necessities and cleaning supplies. Suppose they are thinking of expanding their business into five domestic markets: Phoenix, Dallas, Chicago, New York, and Atlanta. Assume their primary goal of business is to maximize economic profits, although they want to do business honestly. Show all your calculations and process. Describe your answer for each question in three- to five-complete sentences.
a. You are a business adviser for Alba and Gavigan. Describe a skimming price and a penetration price, and advise them whether they should charge a skimming price or a penetration price, with supportive reasoning for and against each pricing alternative.
b. Are they likely to make economic profits initially? Can they continue to make economic profits in the long term? Why or why not? Discuss.
c. What advice would you give to Alba and Gavigan to help them make more profit in the long term?
Problem 2: You operate your own small building company and have decided to bid on a government contract to build a pedestrian walkway in a national park during the coming winter. The walkway is to be of standard government design and should involve no unexpected costs. Your present capacity utilization rate is moderate and allows sufficient scope to understand this contract, if you win it. You calculate your incremental 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 your incremental costs, depending on capacity utilization rate and other factors. You expect three other firms to also bid on this contract, and you have assembled the following competitor intelligence about those companies.
|Issue||Rival A||Rival B||Rival C|
|Capacity Utilization||At full capacity||Moderate||Very low|
|Goodwill Considerations||Very concerned||Moderately concerned||Not concerned|
|Production Facilities||Small and inefficient plant||Medium sized and efficient plant||Large and very efficient plant|
|Previous Bidding Pattern||Incremental cost plus 35-50%||Full cost plus 8-12%||Full cost plus 10-15%|
|Cost Structure||Incremental costs exceed yours by about 10%||Similar cost structure to yours||Incremental costs 20% lower but full costs are similar to yours|
|Aesthetic Factors||Does not like winter jobs or dirty jobs||Does not like messy or inconvenient jobs||Likes projects where it can show its creativity|
|Political Factors||Decision maker is a relative of the buyer||Decision maker is seeking a new job||Decision maker is looking for a promotion|
Show all of your calculations and processes. Describe your answers in three- to five-complete sentences.
a. What price would you bid if you must win the project?
b. What price would you bid if you want to maximize the expected value of the contribution from this contract?
c. Defend your answers with discussion, making any assumptions you feel are reasonable and/or are supported by the information provided.