Pricing strategy

Question 1

Background
The New Brunswick Company is a midsized subsidiary of the Sun Corporation, which manufacturers various textile and similar ma¬terial composites. Sales are made to affiliate companies within the Sun Corporation, as well as to external companies. Approxi¬mately one-half of New Brunswick's sales are to affiliated companies.
New Brunswick's formal mission state¬ment reads as follows:

New Brunswick's mission is to develop and supply unique, cost effective fabrics and related non conventional structures to proactively support the Sun Corporation's worldwide consumer and professional market.
An extension of New Brunswick's mission is to capitalize on the resultant unique product and fabric capabilities by developing profitability franchises in selective growth-oriented consumer and industrial markets.
This will be accomplished while satisfying the
expectations of the company and fostering commitment, challenge, and reward for our employees.

This statement has received wide approval from the corporate level and from the management boards. It serves as the driving force for New Brunswick's management and sets clear objectives.

The Product

Fifteen years ago, New Brunswick research began evaluating a fabric formation technol¬ogy (originally developed by the Smith Com¬pany, a competitor) called Super Weave. In this technology, fibers are entangled mechani¬cally using water sprayed under high pressure. The resulting fabric is very cloth like in appear¬ance, feel, and comfort. The Smith Company realized early on that this fabric would make an ideal barrier in the operating room. The new fabric would provide an effective dispos¬able replacement for operating room drapes and gowns, providing a greater degree of sterility than had been attainable in the past.
Within the Sun Corporation's family of companies, Sanitech is responsible for asep¬sis within the operating room. To this end, Sanitech markets operating room apparel, gloves, and disinfectants.
Ten years ago, Sanitech began marketing operating room packs and gowns using the Smith fabric. Although the franchise was suc¬cessful, the relationship between supplier and customer did have drawbacks, which the Sun Corporation, Sanitech, and New Brunswick fully understood:

1. Product improvements made by Smith might not be exclusive to Sanitech in the future, be¬cause Smith could sell to Sanitech's competi¬tors.
2. Smith's capacity versus Sanitech's demand.
3. Lack of a second source.
4. Fear of monopolistic pricing practices.

Required
(1) How should New Brunswick develop its pricing strategy?
(2) How should the benefit to the Sun Corpo¬ration be measured?
(3) What might Smith's reaction be to your strategy?
(4) Should vertically integrated corporations be forced to procure raw materials from other divisions?
(5) Should inter-company pricing policy be inflexible?