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Pricing Strategies Based On Marginal Cost Increase

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You manage a company that competes in an industry that is comprised of five equal-sized firms that produce similar products. A recent industry report indicates that the market is fairlysaturated, in that a 10 percent industry-wide price increase would lead to a 22 percent decline in units sold by all firms in the industry. Currently, Congress is considering legislation that would impose a tariff on a key input used by the industry. Your best estimate is that, if the legislation passes, your marginal cost will increase by one dollar. Based on this information, what price increase would you recommend if the tariff legislation is passed by Congress? Explain.

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The solution calculates the pricing strategies based on marginal cost increase.

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The fact that the industry is relatively saturated and that a 22% decline will be seen by just a small increase in price indicates that the oligopoly is operating ...

Solution provided by:
Robert Reinhart, MBA
Education
  • MBA, Merage School of Business, Univ of Cal, Irvine
  • BA, Univ of Cal, Irvine
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