BUSS 517 Managerial Economics

spectacularscarecrowAI and Robotics

Nov 17, 2013 (5 years and 8 months ago)


BUSS 517 Managerial Economics

based Learning

Problem No. 1

Prepared by Group C

Susanna Kong, Susan Cheung, Fergus Ko, Michelle Kan

Florence Yip, Wendy Ting, Vincie Lee, Nicky Ng

Nov 4, 2002

Question A

Evaluates the three recommendations

plus Pricing by Accountant

Benchmarking by Marketing Director

Return on Capital by Company Owner

3 Price Setting Methods

Recommended Price : $105

Average Direct cost + Margin for Overhead +
Margin for Profit

$5+$100 = $105


Without considering the competitor’s price and
customer demand

Without considering the external factors


Price set cannot help achieving maximum profit

plus Pricing Method

Recommended Price : $200

Price of similar software without the grammar checking feature


The method is more applicable under a perfect competition
market with identical products and same price

Not applicable under a monopolistic competition market with
new product, new feature

Benchmarking can only serve as a reference

Should evaluate how valuable the new feature is and the extra
amount consumer willing to pay for

Benchmarking Pricing Method

Recommended Price : $150

A target return pricing method based on return on capital


The method is more applicable only for long run pricing

Return on capital includes fixed cost which do not comply
with the company’s objective to achieve maximum profit in
the short run

In short run, only marginal cost and marginal revenue is
being considered

Return on Capital Pricing Method

Question B

Suggests a price

Steps for Price Setting

Step 1

Evaluate the Market Situation

Voice Recognition

Software Market


Other Languages


Penpower Voice Writer





Nuance ……

Step 1

Evaluate the Market Situation (Cont’d)

Market Structure

Monopolistic Competition

Many firms in the market

Free entry

Differentiated product (voice recognition
software with a new feature able to perform
Chinese grammar checking)

Steps for Price Setting

Step 2

Assessment of Company Objective

Company Objective

Profit Maximization

The company aims at achieving as much profit as
possible in the next year (Short Run)

Steps for Price Setting

Steps for Price Setting

Step 3

Evaluate the Product Nature

This is an IT software product

The market contains a group of “trendsetters” or
adopters” who must have, or like to have, a
product first and are willing to pay a higher price for it

The market also contains a significant group of
buyers prepared to pay high prices because of this
new feature

Inelasticity of Demand

Price insensitive

Steps for Price Setting

Step 4

Evaluate the Product Life Cycle

This new product is at introductory stage

It has new feature with grammar checking of the
Chinese input

No other company is able to offer this new feature
and no substitute in short run

The high price will not induce entry in a short run
because it takes a long time and huge cost for
product development and imitation

Steps for Price Setting

Step 5

Set Pricing Strategy

Suggest to use Skimming Pricing Strategy

Price = Benchmark the similar product + Max. value
of new feature which buyers are willing to pay

Price = $200 + $?

The value $? can be found by conducting a focus

Focus group told us that the max. value they are
willing to pay for this new feature is $100

Steps for Price Setting

Step 6

Set The Price

We propose to set the price at

Pricing tactics: psychological pricing below $300

If experience shows it is the wrong strategy, the price
can be cut without much customer resistance

Question C

Outlines any factors that would lead to
the adjustment of the recommended
price, after its launch

Change of Pricing Objectives

Change of Market Structure

Change in Product Life Cycle

Change in 5

Change of Pricing Objectives

If company objective change from profit
maximizing to :

Target Rate of Return

Conflict between long run profit and short run profit

Recommended price decrease

Target Market Share

Preference on market share than profit

Recommended price decreases


Meeting or matching competition

Set by market forces

Recommended price decreases

Change of Market Structure

When time goes on, there may have changes in
market structure :

When profit of this market goes up, many competitors
enter into this market

Perfect Competition


Recommended price decreases

When profit of this market goes down because of
vigorous competition and only few firms survive


Recommended price increases to collusion price

Change in Product Life Cycle

Products have limited lives and they will pass
through a series of distinct stages

Relatively simple relationship between
different stages of PLC and optimal level of

the two being linked by gradually
increasing elasticity of demand over time

Change in Product Life Cycle









Price Elasticity and Product
Life Cycle

Introductory Period

Buyers hardly aware of the product

Low sales volume and price inelastic of demand

Large investment in promotion of new product

Substantial margin aim to profit maximizing

Recommended price increases

Price Elasticity and Product
Life Cycle

Growth Phase

Buyers more aware of the product

Sales grow rapidly and more price elastic of

Competitors start to enter

Smaller margin

Recommended price decreases

Price Elasticity and Product
Life Cycle

Maturity or Saturation

Sales slows down, eventually to zero

Buyers well informed

Competitors produce substitutes

Price elasticity of demand continue to increase

Further reduction of margin

Further decrease in recommended price

Price Elasticity and Product
Life Cycle


Changes in buyers’ requirement

Increase in competition

Changes in technological progress

Sales decline

Very high price elasticity

Narrow margins

Recommended price continues to decrease

Change in 5

Power of


Power of


Threat of


Threat of


Intensity of

Rivalry Amongst


Intensity of Rivalry Amongst

No competitor in short run

Competitor will develop similar software in
long run

Increase in intensity of rivalry leads to
decrease in recommended price

Threat of Entry

Low capital investment

Product differentiation can be copied by
other competitors very quickly

Increase in threat of entry leads to
decrease in recommended price

Threat of Substitutes

No exact substitutes

However, close substitutes exist


brands voice writer without grammar

Hand writer

Increase in no. of
substitute leads to
decrease in recommended rice

Power of Buyers

Power of wholesalers is relatively high

Recommended price decreases

Power of retailer is relatively low

Recommended price increases

Power of Suppliers

Availability and no. of suppliers is high

Switching cost of transferring to alternative suppliers
is low

Power of suppliers is low

However, bargaining power of supplier does not
have impact on our recommended pricing in this case

Our Recommended Price = Benchmark the similar product +
Max. value of new feature which buyers are willing to pay

use bench mark

No change in recommended price

The End

Thank You