7/21/2019 ScmQ12

GANTA.MURALI
LS1508233

SUPPLY CHAIN MANAGEMENT

HOMEWORK6

Question 12 :

The Orange company has introduced a new music device called the J-Pod. The J-Pod is sold through Good Buy,
a major electronics retailer. Good Buy has estimated that demand for the J-Pod will depend on the final retail
price p according to the demand curve

Demand D = 2,000,000 - 2,000p

The production cost for Orange is $100 per J-Pod.

a. What wholesale price should Orange charge for the J-Pod? At this wholesale price, what retail price should
Good Buy set? What are the profits for Orange and Good Buy at equilibrium?

b. If Orange decides to discount the wholesale price by $40, how much of a discount should Good Buy offer to
customers if it wants to maximize its own profits? What fraction of the discount offered by Orange does Good
Buy pass along to the customer?

Answer :

Demand curve : D = a-bP

Denote: Profit = (a-bP)x(p-c)
So p* = (a + bc)/2b

a.
Given that Demand D = 2,000,000 – 2,000p and the production costs for Orange is $100 per unit
=> a = 2,000,000
b = 2,000
c = 100
We get the optimal price by setting
P* = (2,000,000 + 2,000x100)/4000 =$550
So, Orange should change the wholesale price to $550.
At this wholesale price, for a retailer - Good Buy would set a retail price equal to :
P* = (2,000,000 + 2,000x550)/4000 = $775.

Profits for Orange at equilibrium :

( 1,000,000 - 1,000 x 550)(550 - 100) = $202,500,000
Profits for Good Buy at equilibrium:
(2,000,000 - 2,000 x 775)(775 - 550) = $101,250,000.

b.
If Orange offers a $40 discount to Good Buy, it mean c of Good Buy = 550 - 40 = $510
Then the new price would be :
(2,000,000 + 2,000 x 510)/4000 = $755

Good Buy would pass along $20 or 50% of the discount offered by Orange.

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GANTA.MURALI
LS1508233

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