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    Shaping the Market Offering

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    The online market for travel services will reach $63 billion within a few years, and Priceline.com aims to capture a significant share; already, it is high on the top-ten list of travel Web sites. After a brief period of diversification into name-your-price sales of groceries and gasoline, the company has refocused on its core travel and financial services offerings, including airline tickets, hotel rooms, rental cars, and mortgage loans. The company guarantees that a Priceline.com mortgage is the "lowest-cost loan on the market" and backs this up by paying $300 to any customer who finds a better price.

    Visit the Internet sources, to see how the Priceline system works. At the Priceline website, follow the link marked "How it works" to read about the name-your-price process. Then return to the home page and follow several of the links promoting discounted offerings.

    1. Define price sensitivity. Provide relevant examples.

    2. What can you say about the price sensitivity of Priceline's customers?

    3. What effect would Priceline's prices be likely to have on the reference prices customers bear in mind for travel and mortgage services?

    4. How does the company's lowest-cost loan guarantee affect a customer's perception of the product's value?

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    Solution Preview

    The demand for a particular good or service depends on a variety of factors. Key influences include the tastes of consumers, the levels of consumer income, the price and quality of the product in question and the prices of other goods, especially goods that are close substitutes. In order to obtain useful estimates of the price sensitivity of demand for a product, researchers must carefully control for all the factors affecting the demand.

    As a general rule, when other influences on demand remain unchanged, a higher price for a product results in a lower quantity demanded. However, the price responsiveness of demand varies from one good to another and from one market to another. The own-price elasticity of demand ...