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Week 5 Discussions and Required Resources

Two-part assignment – All parts must be at least 300 words unless otherwise noted. Please read all attachments and follow ALL instructions.

Part 1: Good Will in Price Bidding

Sometimes, a bidder on a work contract may bid lower than what would maximize his/her profit from the contract and the reason for that is to create goodwill (to increase expected future business from the buyer). How would you value the goodwill that is obtained in this way?
 

Guided Response: Think about an example that pertains to you. If there is expected goodwill would you be prepared to bid lower to get a contract? Explain your reasons. In 300 words or more, please, provide your response to the above discussion question.

Part 2:   New Production Introduction

Bayer Schering Pharma AG, Germany owns Alka-Seltzer, which was launched in 1931 and was meant for relief of minor aches, pains, inflammation, fever, headache, heartburn, sour stomach, indigestion, and hangovers. Alka-Seltzer Plus was a spin-off of the original medicine, meant to relieve colds and flu.
 

The company has recently introduced a new and improved Alka-Seltzer Plus, as described in this TV ad (Links to an external site.).
 

The ad shows that Alka-Seltzer Plus can fight congestion, unlike NyQuil.
 

Explain how Alka-Seltzer Plus has been quality and price-positioned in an existing market. In your opinion, has Bayer positioned their product appropriately in the market for cold and flu symptoms relief products? Would you advise Bayer to use a skimming or a penetration pricing strategy? Explain your reasoning.
 

How do you think Proctor and Gamble, the company who produces Vicks NyQuil, would respond to the ad?
 

Guided Response: In 300 words or more, please, provide your response to the above discussion question. If Bayer is currently making normal profits on most of the products in its product line, but is making pure profits on its new Alka-Seltzer Plus with decongestant, what should Bayer do to increase its profits? 

Required Resources

Text

Please read the following chapters in: Managerial Economics:

Douglas, E. (2012). Managerial Economics (1st ed.) [Electronic version]. Retrieved from https://content.ashford.edu/

· Chapter 9: New Product Pricing and Pricing in New Markets.

· Chapter 10: Competitive Bids and Price Quotes

Multimedia

· FeelVibe10.  (2014, May 14). Alka Seltzer Plus cold and cough TV commercial, ‘library’ (Links to an external site.) [Video file]. Retrieved from https://www.ispot.tv/ad/767d/alka-seltzer-plus-cold-and-cough-library

Recommended Resources

Websites

· Bloomberg (Links to an external site.). (http://www.bloomberg.com)

· Cable News Network (Links to an external site.). (http://www.cnn.com)

· The Economist (Links to an external site.). (http://www.economist.com)

Week 5 Discussions and Required Resources

Two-part assignment – All parts must be at least 300 words unless otherwise noted. Please read all attachments and follow ALL instructions.

Part 1: Good Will in Price Bidding

Sometimes, a bidder on a work contract may bid lower than what would maximize his/her profit from the contract and the reason for that is to create goodwill (to increase expected future business from the buyer). How would you value the goodwill that is obtained in this way? Guided Response: Think about an example that pertains to you. If there is expected goodwill would you be prepared to bid lower to get a contract? Explain your reasons. In 300 words or more, please, provide your response to the above discussion question.

Part 2:  New Production Introduction

Bayer Schering Pharma AG, Germany owns Alka-Seltzer, which was launched in 1931 and was meant for relief of minor aches, pains, inflammation, fever, headache, heartburn, sour stomach, indigestion, and hangovers. Alka-Seltzer Plus was a spin-off of the original medicine, meant to relieve colds and flu. The company has recently introduced a new and improved Alka-Seltzer Plus, as described in this TV ad (Links to an external site.). The ad shows that Alka-Seltzer Plus can fight congestion, unlike NyQuil. Explain how Alka-Seltzer Plus has been quality and price-positioned in an existing market. In your opinion, has Bayer positioned their product appropriately in the market for cold and flu symptoms relief products? Would you advise Bayer to use a skimming or a penetration pricing strategy? Explain your reasoning. How do you think Proctor and Gamble, the company who produces Vicks NyQuil, would respond to the ad? Guided Response: In 300 words or more, please, provide your response to the above discussion question. If Bayer is currently making normal profits on most of the products in its product line, but is making pure profits on its new Alka-Seltzer Plus with decongestant, what should Bayer do to increase its profits? 

Required Resources

Text

Please read the following chapters in:  Managerial Economics :

Douglas, E. (2012).  Managerial Economics  (1st ed.) [Electronic version]. Retrieved from https://content.ashford.edu/

· Chapter 9: New Product Pricing and Pricing in New Markets.

· Chapter 10: Competitive Bids and Price Quotes

Multimedia

· FeelVibe10.  (2014, May 14).  Alka Seltzer Plus cold and cough TV commercial, ‘library’ (Links to an external site.)  [Video file]. Retrieved from https://www.ispot.tv/ad/767d/alka-seltzer-plus-cold-and-cough-library

Recommended Resources

Websites

· Bloomberg (Links to an external site.). (http://www.bloomberg.com)

· Cable News Network (Links to an external site.). (http://www.cnn.com)

· The Economist (Links to an external site.). (http://www.economist.com)

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Week 5 Overview

Chapters 9 & 10 New Products and Marketing Price

This week we will concentrate on 2 variables of the 4 P’s of marketing which is on New Product Development and Market Pricing. These two are the nuts and bolts of what all businesses do. These are two most important variables of a firm that require strategic consideration which economic theory becomes necessary. We will discuss both of these examples on how firms apply variables in our discussion and our Week 5 assignments so you have a clearer picture as to how these principles work. In Chapters 7 and 8 during Week 4, we studied the 4 types of Markets Structures and Pricing. Pricing with a Perfect Competitive Firm was when the firm being a Price Taker must set P = MC. This being said, because there are so many Gas C Marts all over town, most gas prices are lower because there are so many. However, in many cases gas has become a loss leader to many Company C Marts that try to leverage gas, to get people to buy higher priced in store products like coffee and donuts. However, because there are so many C Marts selling the same products, price still depends on what the customer is willing to pay whether in gas or product. Monopolistic Competition; and Oligopoly firms are price makers because there are much fewer. These firms due to market differentiation are able to raise prices of their products. The firms that are within the market have decided not to create a price war, but allow each firm to set a higher price, but then they compete in the other 3 P's of marketing against each other. They compete in product, place and promotion. McDonald's is an example of a monopolistic competitive firm, while many Pharmaceuticals like Pfizer are the example of oligopolies. There are not many real monopolies, and most are natural monopolies like your local electric company which have sizable fixed costs that need to be spread over a large number of users. Chapter 8 dealt with different pricing strategies such as price discrimination or multiple pricing or even cost plus pricing and several others.

 

Chapters 9 and 10 New Product and Market Pricing and Competitive Bidding and Cost-Plus Pricing. Firms are always trying to entertain what Market Pricing of its product is. We studied earlier the importance of a firm knowing its elasticity of demand. The reason a firm want so understand its elasticity is because it is a clue to whether a firm is a price taker or a price maker. For example, price taker firms that have a lot of competition like gas stations, have less choice over the price of its gas. However, firms that have less competition like Cole and Pepsi are price maker firms which are firms that have more control of their price. Or gas stations are said to have a more elastic demand curve while both Coke and Pepsi which by the way are oligopolies are said to have inelastic demand curves so they can raise prices higher.  One firm that is great and continuous rising prices is Apple which every 6 months seems to come out with a newer product offering to raise prices on. Later, after 3 months it will drop prices to find additional users who are more interested in purchasing at a lower price. So there is those firm’s that must keep prices lower, those who will keep them higher like de Beers diamond merchants and Apple who will do a mix of the two. As for de Beers, it has an inelastic demand curve so it can price its product at very high prices and still receive sales. However, Wal Mart which we discussed last time has a more elastic demand curve so it can only price its products with lower prices to capture more customers. Most of you have shopped both for diamonds and at Wal-Mart so you know what I mean. Both firms are able to make higher than normal profits using both a skimming with de Beers and market penetration with Wal Mart.  Once a firm knows what sort of elasticity it has whether it is elastic or inelastic then it must see out on whether it will do Competitive Bidding pricing which is where a firm will use some sort of price discrimination of setting prices of what different customers are willing to pay. Also Cost-Plus Pricing where a firm will simply add a percentage of 10 – 20% markup on cost which is a far simpler approach to pricing. Finding some sort of methodology that works both for the firm and the customer base is what most firms must try to do. So below I have created some videos to help. 

This week, we will examine the pricing of new-to-the-market and new-to-the-world products introductions, and considered

Economic Issues on Pricing:

https://www.bing.com/videos/search?q=economics+of+pricing&qs=n&form=QBVLPG&sp=-1&pq=economics+of+pricing&sc=8-20&sk=&cvid=A51550B2682F43098EAF7C08ADEB014

Economy Pricing, Price skimming, Penetration pricing, Premium Pricing (Differentiation)

https://www.bing.com/videos/search?q=price%20skimming%20and%20penetration%20pricing&qs=WebSearch&form=QBVR&sp=1&pq=price%20scimming%20and%20pe&sc=2-21&cvid=4A9F97173C764BEEB435FC4343B7C8A 

How Costs can be related to Pricing in the short-run vs. Pricing in the long-run

https://www.bing.com/videos/search?q=how%20costs%20are%20related%20to%20pricing&qs=n&form=QBVR&sp=-1&pq=how%20costs%20are%20related%20to%20pricing&sc=0-32&sk=&cvid=0F792AC84CC24B49B67009D02EA39811

Pricing New Products

http://www.netmba.com/marketing/pricing/   

Elasticity

http://www.ehow.com/way_5835671_elastic-pricing-strategy.html 

http://www.more-for-small-business.com/price-elasticity-of-demand.html 

http://www.ehow.com/way_5300387_strategies-pricing-new-products.html 

http://finance.yahoo.com/news/apple-premium-pricing-strategy-product-191247308.html

http://www.marketingteacher.com/lesson-store/#essentials

http://www.ops.fhwa.dot.gov/publications/fhwahop08041/fhwahop08041.pdf 

So what do these procedures have to do with profit maximization goals of firms.

Jack Welch in his book emphasizes differentiation as being the chief reason of GE’s success under his management. We also study the impacts of product differentiation.

http://techtv.mit.edu/videos/16796-a-new-conversation-with-jack-welch 

Product Differentiation (Premium Pricing)

These two firms are referred to as Imperfect Competition where they can set MR = MC by reducing supply, but they need to differentiate to make the above formula work. That is why both firms (in monopolistically competitive and oligopolistic markets) are said to have a differentiation edge over Mom and Pop firms in Perfect Competition, because they have excess profits above a normal rate of profit, that firms in Perfect Competition can only obtain, hence they can only receive profits where P = MC, which price is much less than these two more profitable firm types.

Game theory is one approach of which Oligopolies like Coke and Pepsi operate.Both of these firms have unique extra strategies that the other doesn't have. For example, Coke has remained in the Coke dispensing business but has markets its products like cigarette companies Internationally. During the war years, Coke made sure its product was in the hands of the military and used this as an advantage so today, Coke can be found even in India and China. Pepsi had a different strategy by entering into the snack industry. It has Lays Potato Chips and a whole host of other snacks it offers along with its bottle beverages and its pumped syrups.

https://www.bing.com/videos/search?q=coke%20and%20pepsi%20game%20theory&qs=WebSearch&form=QBVR&sp=2&pq=coke%20and%20pepsi%20game&sc=4-19&cvid=8839353BAE5A453CA9414D784B9C9ACF 

Part of the reason that firms that are said to be (of the monopolistic competition and oligopolies variety) because they have less competition and the reason they have fewer competitor is because of barriers of entry. I added several Graphs and ideas on both of these and pricing Week 4 and videos there for you to review.

What are some barriers to entry on the profitability and the incentives of firms to introduce new products. (Sorry that it is Philippine oriented but even if you don’t know the products you can guess).

https://www.bing.com/videos/search?q=coke%20in%20the%20philippines&qs=WebSearch&form=QBVR&sp=1&pq=coke%20in%20the%20ph&sc=6-14&cvid=C28A6BE74D4E4D59B409748CD541CC0 

We considered some impediments to new production adoption by buyers and the ways in which managers try to overcome them.

Also this week, we apply contribution approach to the pricing situation where firms must make competitive tenders for sales to buyers both to firms as well as to Government agencies in the form of bids.

Pricing Methods used by firms:

fixed-price vs. auction pricing on eBay,

https://www.bing.com/videos/search?q=fixed%20vs.%20auction%20pricing&qs=n&form=QBVR&sp=-1&pq=fixed%20vs.%20auction%20pricing&sc=0-25&sk=&cvid=A0867C9AE1334CBC91502868D4DD4F81 

cost-plus-fee,

https://www.bing.com/videos/search?q=cost%20price%20pricing&qs=n&form=QBVR&sp=-1&pq=cost%20price%20pricing&sc=3-18&sk=&cvid=917422C17BF14C6D9564C59D1D97E5D

market incentive pricing (risk of losing sales if a firm or individual won’t price right)

https://www.bing.com/videos/search?q=market%20incentive%20pricing&qs=n&form=QBVR&sp=-1&pq=market%20incentive%20pricing&sc=0-24&sk=&cvid=B5A9107E30BB4572AB0C472DD50C0C75

Due to simplicity, many firms do not set MR = MC as at first thought especially those firms that are smaller with more competition, but which are not firms in perfect competition. Larger firms because there are fewer competitors are more profitable and become more active MR = MC setters similar to the models you review in Week 4.

So in reality, many firms instead will choose to use mark-up pricing or simple rule pricing when search costs are high or when profit maximization may not be the primary goal of the seller. 

Incremental Costs

https://www.wallstreetmojo.com/incremental-costs/ 

https://www.accountingcoach.com/blog/what-is-an-incremental-cost 

Allocative Costs

https://ashford.instructure.com/conversations#filter=type=inbox

https://www.accountingtools.com/articles/cost-allocation-methods.html 

Douglas, E. (2012).  Managerial Economics   (1st ed.). San Diego, CA: Bridgepoint Education.

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9

© Digital Vision/Thinkstock

New Product Pricing and Pricing in New Markets

Learning Objectives

A�er reading this chapter, you should be able to:

Explain how new products might be quality- and price-posi�oned in exis�ng markets. Dis�nguish between new-to-the-market products and new-to-the-world products and the pricing implica�ons of each. Explain why the extent of product differen�a�on is cri�cally important for price making. Recognize how barriers to entry are important to retain excess profitability. Iden�fy that even where entry barriers are not insurmountable, the firm has a profit incen�ve to introduce innova�ve new products.

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Entrepreneurs such as Michael Dell, the founder and CEO of Dell Inc., introduce new products and services through startup business ventures with the aim to commercialize new ideas and earn a profit.

© ASSOCIATED PRESS/AP Images

Introduction

New products1 (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/ch09introduc�on#footernote1) are introduced on an almost daily basis as exis�ng firms strive to rejuvenate their product lines to maintain their compe��veness and market share. New products are also introduced by entrepreneurs who start new firms to commercialize new technologies. Because new products are new to the market, managers must decide what price will be appropriate for their new product, and will make this decision a�er considering the prices of exis�ng products in the market and the novelty of their new product rela�ve to other products. The lack of prior produc�on and market experience with their new product means managers will not have much, if any, informa�on on which to base their es�ma�on of demand and cost curves for these products.

We shall dis�nguish between products that are new to the market and those that are new to the world. By new to the market we mean a new brand in an exis�ng market where the new product is simply a new variant in an exis�ng product category, such as a new brand of dish detergent that claims enhanced cleaning power. These have been called crea�ve imita�ons and are "new" to the extent that they offer the market a new combina�on of product a�ributes (see Chapter 3)—that is, the new product is differen�ated from what has previously been offered to the market by the other brands. New to the world means the product offers a new way to serve customers’ needs, such as the Segway Personal Transporter, which was introduced to the market for personal transporta�on in

2002.2 (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/ch09introduc�on#footernote2) New-to-the-world products are typically the outcome of disrup�ve innova�on, which creates a new technological pla�orm, as dis�nct from sustaining technology innova�on, which allows improvements on an exis�ng technology pla�orm providing enhancements to products that serve to differen�ate them from other products already available in the market (Bower & Christensen, 1995).

This chapter is organized on the basis of the new-to-the-market versus new-to-the-world dichotomy. In the next sec�on, we will examine the pricing decision in the context of introducing new product variants into exis�ng markets and, thus, consider topics such as price skimming, penetra�on pricing, price posi�oning, and product-line pricing. In the third sec�on, we will be concerned with pricing new-to-the-world products and examine the "diffusion curve" phenomenon, which causes the adop�on rate of new products to be slow at first and then progressively faster up to a point, a�er which the rate of customer adop�on becomes progressively slower un�l the firm’s maximal market share is a�ained, other things being equal. The diffusion curve phenomenon means that the quan�ty demanded at any par�cular price increases from one produc�on period to the next, and thus, causes shi�s of the demand curve from one period to the next, and this in turn has implica�ons for the profit-maximizing price in each period. We also consider the case of geographic expansion of an exis�ng product, where the product is at first an unknown new product in the new geographic area, such as an Indian-made car entering the U.S. automobile market under a new brand name (e.g., Tata).

1. Just a reminder that we use the term "products" to mean the output of the produc�on process, so product could mean either a physical product or an intangible service, or some combina�on of products and services. This saves having to say "products and services" every �me "product" is men�oned. [return (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/ch09introduc�on#return1) ]

2. In case you have not seen one, see www.segway.com (h�p://www.segway.com) . The Segway is a ba�ery-powered two-wheeled, single-passenger vehicle that goes in the direc�on that you lean it, u�lizing gyroscopes to balance the rider. It is quite unlike any other form of personal transporta�on, such as bicycles, motorbikes, scooters, or horses, yet it serves the same basic need, that is, to transport a person from one loca�on to another. [return (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/ch09introduc�on#return2) ]

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Tide laundry detergent pods are an example of a new-to-the- market product. Offering a new combina�on of product a�ributes, new-to-the-market products are an innova�ve varia�on on an exis�ng product category.

© ASSOCIATED PRESS/AP Images

9.1 Pricing New-to-the-Market Products

Marke�ng textbooks tend to advocate either price skimming or penetra�on pricing for new products. To skim means to take something off the top, such as skimming the cream off the top of milk. Price skimming means to set a very high price that allows rela�vely high profit outcomes for the firm. Penetra�on pricing, on the other hand, means to set a rela�vely low price that causes more units of the product to be sold and, thus, achieve greater penetra�on into the market. Both of these approaches may result in profit maximiza�on—skimming is intended to maximize profits in the short term whereas penetra�on pricing is intended to maximize profits over the longer term. We shall consider these in turn.

Price Skimming

Price skimming is intended to gain as much profit for the firm as possible in each produc�on period. As such, the skimming price must be the same as the short-run profit-maximizing price, since there is no point se�ng a price higher or lower than that if the inten�on is to gain as much profit as possible. By now you are very familiar with the marginalist pricing rule for profit maximiza�on (i.e., set MC = MR), which would be used a�er considera�on of the es�mated demand and cost curves, if reliable es�mates of this data can be obtained at reasonable search cost. But herein lies the problem: With a new product, there is no prior history of customer demand or produc�on costs that is exactly applicable to this product. Thus, we must extrapolate (i.e., go outside the limits of the available data) from data rela�ng to similar but differen�ated products already available in the same product category. Obviously, the more closely subs�tutable the new product is for one or more of the other products in the category, the more reliable our es�mates will be, with the extreme case being the iden�cal-products case (i.e., pure compe��on) where the informa�on derived from observa�on of an exis�ng product is fully applicable to the new product entering the market (and, thus, the new product simply accepts the prevailing market price).

In differen�ated-product markets, however, there will be a range of prices chosen by the firms that reflect differences in the qualita�ve a�ributes of the compe�ng products. In a world of full informa�on (i.e., zero search costs) with firms that want to maximize short- run profit, these different prices will reflect different loca�ons of the MC curves (due to cost differences required to produce the different quali�es) and different loca�ons of the MR curves (due to demand differences for par�cular products due to the differences among customers’ preferences for the various a�ributes of the products). This gives rise to an observable relevant range of prices, which is the range of prices from the most expensive to the least expensive of the products in the same product category. Associated with the relevant range of prices will be a relevant range of quality; that is, the compe�ng products would probably offer mostly the same core product a�ributes with each product poten�ally offering more or less of each of these a�ributes and addi�onally offering one or more quality a�ributes that rivals do not offer (e.g., their loca�on, brand name, and reputa�on, if not addi�onal tangible characteris�cs). If the firm’s new product offers the core quality a�ributes that characterize the product category and some or most of the product a�ributes that are offered by others in the relevant product category, then the new product’s price should be expected to fall

somewhere within the relevant range of prices.3 (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/sec9.1#footernote3)

How does the manager proceed to set the actual price for the new product? If search costs are not zero but are indeed significant, the manager should first consider adop�ng a markup pricing rule. The manager will have es�mated the projected average variable costs (AVC) of the new product but any es�mate of average fixed cost (AFC) must await an es�mate of the quan�ty demanded (volume sold) of the new product and that will depend on the price chosen and will be revealed only later when the market reacts to the introduc�on of the new product. So what markup over AVC should the manager choose? To be compe��ve with rival products the new product’s price must be carefully posi�oned such that it offers a compe��ve value proposi�on to customers in that market.

Price Posi�oning for a Compe��ve Value Proposi�on

Price posi�oning is the selec�on of price within the relevant range of prices for rival products such that the chosen price offers a compe��ve value proposi�on to prospec�ve customers. As you know, the value proposi�on can be defined as a measure of perceived quality divided by a measure of price. To illustrate using a simple example, consider Figure 9.1 where product quality and price are shown as one-dimensional (e.g., simply larger or smaller volume of a par�cular beverage in different sized containers, and price is in dollars per container with no other costs of purchasing). We depict four products, labeled A, B, C, and D, that have different quali�es (le�-hand axis) and different prices (right-hand axis). As we saw in Chapter 8, par�cular customers will perceive these differing size containers of beverage as having higher or lower value proposi�ons due to the differing reserva�on prices they place on each of the product offerings.

Figure 9.1: Compe��ve value proposi�ons, bargains, and rip-offs

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