in the market for one of its products md and its two major competitors cn and kl tog 597765
Pricing decision based on competitor’s response
In the market for one of its products, MD and its two major competitors (CN and KL) together account for 95% of total sales.
The quality of MD’s products is viewed by customers as being somewhat better than that of its competitors and therefore at similar prices it has an advantage.
During the past year, however, when MD raised its price to £1.2 per litre, competitors kept their prices at f1.0 per litre and MD’s sales declined even though the total market grew in volume.
MD is now considering whether to retain or reduce its price for the coming year. Its expectations about its likely volume at various prices charged by itself and its competitors are as follows:
|
MID |
CN |
KL |
MD’s expected sales |
|
(£) |
(£) |
(£) |
million litres |
|
1.2 |
1.2 |
1.2 |
2.7 |
|
1.2 |
1.2 |
1.1 |
2.3 |
|
1.2 |
1.2 |
1.0 |
2.2 |
|
1.2 |
1.1 |
1.1 |
2.4 |
|
1.2 |
1.1 |
1.0 |
2.2 |
|
1.2 |
1.1 |
1.0 |
2.1 |
|
1.1 |
1.1 |
1.1 |
2.8 |
|
1.1 |
1.0 |
1.0 |
2.4 |
|
1.1 |
1.0 |
1.0 |
2.3 |
|
1.0 |
1.0 |
1.0 |
2.9 |
Experience has shown that CN tends to react to MD’s price level and KL tends to react to CN’s price level. MD therefore assesses the following
8.6 Expected value, maxim in and regret probabilities:
|
If MD’s price |
there is a |
that CN’s price |
|
per litre is |
probability of |
per litre will be |
|
1.2 |
0.2 |
1.2 |
|
0.4 |
1.1 |
|
|
0.4 |
1.0 |
|
|
1.0 |
||
|
1.1 |
0.3 |
1.1 |
|
0.7 |
1.0 |
|
|
1.0 |
||
|
1.0 |
1.0 |
1.0 |
|
If CN’s price |
there is a |
that ICUs price |
|
per litre is |
probability of |
per litre will be |
|
(£) |
(£) |
|
|
1.2 |
0.1 |
1.2 |
|
0.6 |
1.1 |
|
|
0.3 |
1.0 |
|
|
1.0 |
||
|
1.1 |
0.3 |
1.1 |
|
0.7 |
1.0 |
|
|
1.0 |
||
|
1.0 |
1.0 |
1.0 |
Costs per litre of the product are as follows:
|
Direct wages |
£0.24 |
|
Direct materials |
£0.12 |
|
DepartMental expenses: |
|
|
Indirect wages, |
16 2/3 % of |
|
maintenance |
direct wages |
|
and supplies |
|
|
Supervision and depreciation |
£540 000 per annum |
|
General works expenses (allocated) |
16 2/3 % of prime cost |
|
Selling and administration |
50% of manufacturing cost |
|
expenses (allocated) |
You are required to state whether, on the basis of the data given above, it would be most advantageous for MD to fix its price per litre for the coming year at £1.2, £1.1 or £1.0.
Support your answer with relevant calculations.