Activity 1

What would you do?

Options:
(A) Reduce your price
(B) Make no change
(C) Increase your price
Scenarios:
1. To indicate the high quality of a product against a new competitor
o Depends on how loyal your consumers are
2. The market that you are in is deregulated, resulting in more competitors
o You can decrease price or do something else (advertising maybe?)
3. A new substitute product/industry emerges
o How close is the substitute?
4. A major increase in production costs occurs
5. You want to benefit from economies of scale
6. When you know that competitors will match your price changes
o Depends on market structure. If you are in a duopoly/oligopoly, increase price
as consumers may not have any choice. If you are a cost leader/deep
discounter, decrease prices to hurt the industry
7. To increase market share
o Decrease, except for inelastic products
8. For a product that has increased its brand equity
o What is the source of the increase in brand equity?
9. When your product is experiencing high seasonal demand
10. When a major competitor leaves the market
o Depends on market structure and your own size in relation to competitors

Activity 2

There is a “copy-cat” food manufacturer who attempts to 'copy' major selling brands
/products and introduce similar products. Their products often have similar brand names and
packaging but are differentiated enough to avoid legal action.

This food producer relies upon two aspects of their positioning when competing for market
share: 1. That their products are locally made, and therefore the consumers are supporting
local jobs and the local economy, and 2. That their products offer more value than other
leading brands/products, as their copy-cat products are significantly cheaper than the known
brands.

Now let’s assume that a series of blind taste-tests were conducted, with the research
comparing the well-known brand against the copy-cat brand – and that the research actually
revealed that 60% of consumers prefer the taste of the cheaper copy-cat over its well-known
competitor (who is the market share leader). As a result, the market research company has
recommended that the copy-cat brand should increase its price from $1.99 (below the leading
brand’s $2.99 price) to $3.49, in order to communicate the superior quality of the product to
the market.

What would you do?

See Week 4 lecture on the brain scanning experiment (coke vs. pepsi), You would also need to
know if consumers like your brand (not just product) more. Instead of raising prices, you can
launch a premium line of product (E.g. Tesco Finest)

Activity 3

Is this fair?

Q1. A hardware store has been selling snow shovels for $15. The morning after an
unexpected large snowstorm, the store raises the price to $20. Is the store’s action fair?

82% unfair

Q2. A shortage has developed for a popular car model and customers must now wait for two
months for delivery. A dealer has been selling these cars at list price. Now the dealer raises
the price by $200 above the list price.

71% unfair

Q3. Due to a supply chain failure, there is a local shortage of lettuce and the wholesale price
of lettuce has increased. A local grocer bought the usual quantity of lettuce at a price that is
30 cents per head higher than normal. The grocer raises the price of lettuce to customers by
30 cents per head.

21% fair

Q4. A grocery store has several months’ supply of peanut butter in stock. The owner hears
that the wholesale price of peanut butter has increased and immediately raises the price on his
existing stock of peanut butter.

79% unfair

Q5. A small factory produces tables and sells them at $200 per table. Because of recent
changes in the price of materials, the cost of making each table has decreased by $40. The
factory reduces its price of tables by $20.

21% unfair
Q6. A small factory produces tables and sells them at $200 per table. Because of recent
changes in the price of materials, the cost of making each table has decreased by $20. The
factory does not change its price for the tables.

47% unfair

Q7. A severe shortage of Red Delicious apples has developed in a community (but other
variants of apples are plentiful and available easily). A retailer receives a single shipment of
Red Delicious apples at the regular wholesale price but decides to sell them to customers at
50% over regular retail price.

63% unfair

Q8. A grocery chain has many stores in an area. Most of the stores face large competition. In
one community, the store has no competition. Although its costs and volumes of sale are the
same in this store as elsewhere, the chain sets the prices at 10% higher in this store compared
with its other stores.

76% unfair

Fair to raise prices when profits are threatened and maintain prices when costs diminish.

However, people find it unfair to exploit changes in demand by raising prices. See attached
paper by Kahneman et al 1984