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Price competition

Chapter 18-2

The market for digital cameras is relatively new. Ajax Inc. produces what they regard as a high quality digital camera. Knockoff Inc. produces what they regard as low quality digital camera. However, since the market is so new, reputations for quality have not yet developed and consumers cannot tell the difference between an Ajax digital and a Knockoff digital just by looking at them.
If consumers knew the difference, they'd be willing to pay $200 for a high quality camera (i.e., their reservation price for a high quality camera) and they'd be willing to pay $100 for a low quality camera. It costs Ajax $60 to produce a high quality camera and it costs Knockoff $25 to produce a low quality camera.
A recent MBA hire at Ajax suggests that Ajax could differnetiate its camera from Knockoff's by offering a full coverage warranty (i.e., one which would fully cover any defect in their camera at nocost to the customer). The MBA estimates that it would cost Ajax $20 per year to offer suca a warranty. The MBA also estimates that it would cost Knockoff $40 per year should Knockoff attempt to copy Ajax's warranty strategy. Consumers will feel that the camera with the longest warranty is high quality and that with the shortest warranty is low quality. The camera companies want to maximize the profit per camera.
What's Ajax's profit per camera in the digital camera market?

Chapter 20-2

In 1991, local cement makers in Florida filed a complaint against Venezuelan firms, charging that they were dumping cement in Florida. According to U.S. law, dumping occurs when foreigners set their price below "fair market value," which is defined as either the price they establish at home or their cost of production. At that time, more than half of Florida's cement was supplied by local firms, such as a subsidiary of Texas-based Southdown, Inc. The rest came form overseas. The price of cement was roughly $60 in both Florida and Venezuela.

a. Why was it profitable for Venezuelan firms to enter the Florida cement market? (Hint: Ocean transportation was and is cheap relative to railroads or trucks.)
b. If transportation and storage added about $10 to $15 per ton to the cost of sending Venezuelan cement to Florida, does it appear thta the Venezuelan firms were selling cement at a lower price in Florida than in their home markets?
c. According to Kenneth Clarkson of the University of Miami and Stephen Morrell of Barry University, both consultants for the Venezuelan firms, Florida consumers would pay over $600 million more for cement in the period 1991 to 1996 if foreign firms were no longer permitted to ship into the Florida market. If this were ture, should foreign firms have been allowed to continue selling cement at $60 per ton in Florida?

Book: Managerial Economics; Theory, Applications, and Cases
Author: Mansfield and etc. Sixth Edition

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Solution Preview

Costs with one year warranty:
Ajax: 60+20 = 80
Knockoff: 25+40 = 65
Thus, Knockout can still price its product lower than Ajax and get the entire market share.

Costs with two year warranty:
Ajax: 60+20+20 = 100
Knockoff: 25+40+40 = 105
At this point, costs of Knockout are higher than Ajax. However, both companies can price their products at $200 and give a 2 year warranty. Both will make profits this way.

Costs with three year warranty:
Ajax: 60+20*3 = 120
Knockoff: 25+ 40*3 = 145
At this point, costs of Knockout are higher than Ajax. However, both companies can price their products at $200 and ...

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