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Pricing, Profitability, and New Product Introduction

The Wall Street Journal recently reported that Proctor and Gamble is introducing a new low-price version of Tide and raising the price of its high-end products. Answer the following questions about what the report said and what you can derive from you understanding of pricing.

a. "The idea is to 'keep the profit pool the same,' said William Schmitz, an analyst at Deutsche Bank". Is keeping the profit pool the same in the best interest of the shareholders? Explain why or why not. Be sure to make clear what you mean by "profit pool".
b. "Investors want to see P&G increase sales faster than rivals, something it hasn't done for several years." Is building a strategy with the goal of increasing sales faster than rivals in the best interest of the shareholders? Explain why or why not.
c. How does entry by another firm's substitute product typically affect the profit-maximizing price for a firm selling a single product. Does the optimal price increase, decrease, remain constant, or does the effect depend? Explain why?
d. For simplicity, assume that P&G offers only three versions of detergents: good = Tide Simply, better = Tide, and best = Tide Extra. Which version do you think has the highest profit margin? Why?
e. Under what conditions would the optimal price for Tide Extra increase when the firm introduces Tide Simply. Do you think that these conditions are met? Explain.

Solution Preview

a) I am not sure what they mean by "profit pool" means, either; so, I will make my own assumption. Profit pool means that sales value and product mix can change, but the overall profitability of the company stays the same. In competitive capitalism, a for-profit company's purpose is not to maintain shareholder value, like the analyst at DB said, but rather to MAXIMIZE shareholder value. That may mean taking some profits (lowering the "profit pool") and invest in a new product line, for example.

b) Increasing sales faster than competitors must be a part of a larger company strategy. A company can increase sales faster by simply lowering their price to the point that they can buy market ...

Solution Summary

The solution discusses pricing and profitability of new product introduction and results to shareholder value. 463 words.