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BUS 640 Week 1 Assignment Economics of Risk and Uncertainty Applied
Problems
Economics of Risk and Uncertainty Applied Problems. Please, complete the
following 3 applied problems in a Word or Excel document. Show all your
calculations and explain your results. Submit your assignment in the drop box by
using the Assignment Submission button.
1. A generous university benefactor has agreed to donate a large amount of money
for student scholarships. The money can be provided in one lump-sum of $10mln,
or in parts, where $5.5mln can be provided in year 1, and another $5.5mln can be
provided in year 2. Assuming the opportunity interest rate is 6%, what is the
present value of the second alternative? Which of the two alternatives should be
chosen and why?
How would your decision change if the opportunity interest rate was 12%? Please,
show all your calculations.
2. Volkswagen is considering opening an Assembly Plant in Chattanooga,
Tennessee, for the production of its 2012 Passat, tailored for the US market. The
CEO of the company is considering two potential options for the size of the plant:
one is a large size with a projected annual production of 150,000 cars, and the
other one is a smaller size plant, which is cheaper to build, but can only produce up
to 80,000 cars per year. Depending on the expected level of demand for these cars
in the US, Volkswagen has to decide which option is more profitable. The discount
rate is 6% and for simplicity purposes, the CEO is only evaluating a two-year
horizon. The initial factory setup cost, the expected demand scenarios, profit, and
probabilities are shows in the below table. Calculate the Net Present Value in each
of the two options. Which option should the CEO choose and why? Please, show
all your calculations.
3. An angel investor is considering investing in one of two start-up businesses and
is evaluating the expected returns along with the risk of each option in order to
choose the better alternative.
Business 1 is an innovative protein energy drink, which has ENPV of $100,000
with a standard deviation of $40,000.
Business 2 is a unique chicken wings dipping sauce with an ENPV of $60,000 and
a standard deviation of $25,000.
a) Apply the coefficient-of-variation decision criterion to these alternatives to find
out which is preferred by the angel investor, assuming that he/she is risk-averse.
b) Apply the maximin criterion, assuming that the worst outcome in Business 1 is
to lose $5,000, whereas the worst outcome in Business 2 is to make only $5,000 in
profit.
c) If you were the angel investor, what is your certainty equivalent for these two
projects? Are you risk-averse, risk-neutral, or risk-lover?
BUS 640 Week 1 DQ 1 Firm Objectives
Firm Objectives. Why do some business firms pursue a triple-bottom-line outcome
while others focus only on profit maximization? Please, use a real company
example to illustrate your points
BUS 640 Week 1 DQ 2 Decision Making Under Uncertainty
Decision Making Under Uncertainty. To save on gasoline expenses, Edith and
Mathew agreed to carpool together for traveling to and from work. Edith preferred
to travel on I-20 highway as it was usually the fastest, taking 25 minutes in the
absence of traffic delays. Mathew pointed out that traffic jams on the highway can
lead to long delays making the trip 45 minutes. He preferred to travel along Shea
Boulevard, which was longer (35 minutes), but rarely had traffic jams. Edith
agreed that in case of traffic jams, Shea Boulevard was a reasonable alternative.
Neither of them knows the state of the highway ahead of time.
After driving to work on the I-20 highway for 1 month (20 workdays), they found
the highway to be jammed 3 times. Assuming that this month is a good
representation of all months ahead, should Edith and Mathew continue to use the
highway for traveling to work?
How would you conclusion change for the winter months, if bad weather makes it
likely for traffic jams on the highway to increase to 6 days per month?
How would your conclusion change if Mathew purchased a new smart-phone app
that could show the status of the highway traffic prior to their drive each morning,
thus reducing the probability of them getting into a jam down to only 1day per
month (where on this day, the app showed no traffic jam, but a jam developed in
the meantime as they were driving along the highway)
BUS 640 Week 2 Assignment Consumer Demand Analysis and Estimation
Consumer Demand Analysis and Estimation Applied Problems. Please, complete
the following 3 applied problems in a Word or Excel document. Show all your
calculations and explain your results. Submit your assignment in the drop box by
using the Assignment Submission button.
1. Roshima is researching universities where she could study for her MBA
degree. She is considering 3 major attributes that she considers important in
her choice: ranking, price, and location. The value she places on each
attribute, however, differs according to whether she remains full-time
employed during her studies or quits her job and focuses on her degree. If
she continues to work full time and takes all her courses online, then ranking
is the most important attribute, twice as important as price and three times as
important as location. If she quits her job and attends school full time, then
location becomes three times as important as ranking and twice as important
as price. She is considering two universities, respectively, the MBA program
at Arizona State University (ASU) and the MBA program at University of
Phoenix (UOP), both of which are priced at approximately $25,000. She has
rated each attribute on a scale of 1 to 100 for each of the two schools.
2. Which of the two options should Roshima pursue of she wants to keep her
full-time job? (Calculate the total expected utility from each school option
and compare. Graph is not required)
3. Which of the two options should she pick if she plans to quit her job and
dedicate to her studies?
4. Which option should she pursue if the probability of being laid off and
unable to find a new job is estimated as 0.6? Show your calculations and
explain your reasoning.
5. The demand function for Einstein Bagels has been estimated as follows:
– 40.73Px + 84.17Py + 0.55Ax
where Qx represents thousands of bagels; Px is the price per bagel; Py is the
average price per bagel of other brands of bagels; and Ax represents thousands of
dollars spent advertising Einstein Bagels. The current values of the independent
variables are , , and
1. Calculate the price elasticity of demand for Einstein’s Bagels and explain
what it means.
2. Derive an expression for the (inverse) demand curve for Einsteins’s Bagels.
3. If the cost of producing Einstein’s Bagels is constant at $0.10 per bagel,
should they reduce price and thereafter, sell more bagels (assume profit
maximization is the company’s goal)?
4. Should Einstein Bagels spend more on advertising?
5. The consulting firm that you work for has been hired by the US Government
to provide an independent analysis of the demand-side effects of a
contemplated increase in the tax on gasoline. They provide you with a data
set relating to the period 1962-1987, which they say contains valuable
historic lessons relating to the impact of volatile pump prices due to the
supply restrictions imposed by the Organization of Petroleum Exporting
Countries (OPEC), and the Corporate Average Fuel Economy (CAFE)
regulations that required car manufacturers to increase the fuel efficiency of
the cars they sold, while at the same time Real Disposable Income (RDI) per
capita was rising, the number of passenger cars (NPC) almost doubled, and
inflation was pushing up the Consumer Price Index (CPI).
Where: Qx is the gasoline consumption by passenger cars (in millions of gallons);
Px is the retail (pump) price of gasoline, in cents per gallon;
NPC is the number of registered passenger cars (in thousands);
MPG is the national average of miles travelled per gallon of gasoline;
RDI is Real Disposable Income per capita (in 1982 dollars); and
CPI is the Consumer Price Index (base year 1967).
This data illustrates some very interesting issues that were happening over that
tumultuous period of our history. You will note that the pump price of gasoline
more than doubled five-fold from the mid-1960s to the mid-1970s, and then
doubled again in the early 1980s, due to the OPEC crises. The number of
passenger cars climbed relentlessly with the love affair with ‘muscle cars’ despite
the increasing pump price of gasoline, and indeed outpacing the increases in real
disposable income per capita. The average MPG climbed only slowly as
manufacturers increased the fuel efficiency of new cars and consumers slowly
traded up to the more efficient cars new cars and retired their older vehicles. The
changes in CPI show that the rate of inflation was generally much greater than the
rate of increase of pump prices as the increased production and transportation costs
due to rising fuel prices pervaded the entire economy, pushing up the prices of
food and other household items that drive the CPI.
1. Reconcile the fact that while the quantity demanded of gasoline and pump
prices both rise over this period generally, they are inversely related along a
demand curve.
2. Conduct a multiple regression analysis to explain the quantity demanded of
gasoline in terms of the other data provided. (Transpose this data into an
Excel spread-sheet and use the Excel regression tool, if loaded, or
alternatively download an ‘add-in’ regression program such as ‘Statpro’ to
find the regression statistics).
BUS 640 Week 2 DQ 1 Marginal Rate of Substitution
Marginal Rate of Substitution. What is the marginal rate of substitution (MRS) and
why does it diminish as the consumer substitutes one product for another? Use
examples to illustrate
BUS 640 Week 2 DQ 2 Demand Elasticity
Demand Elasticity. Please, read the article Hainer, R. (2010), provided in the
required readings section for this week. The tobacco industry is a prime example to
consider when talking about price elasticity of demand. While nicotine use can be
addictive for many users, it is not addictive for the so-called “social smokers”.
What can we say about the price elasticity of demand for nicotine products (such
as cigarettes, pipes, tobacco) in the group of nicotine addicted users, versus the
group of “social smokers”? Can we say whose demand is likely to be more elastic?
Why?
BUS 640 Week 3 Assignment Production Cost Analysis and Estimation
Production Cost Analysis and Estimation Applied Problems. Please, complete the
following 3 applied problems in a Word or Excel document. Show all your
calculations and explain your results. Submit your assignment in the drop box by
using the Assignment Submission button.
1. Jennifer Trucking Company operates a large rig transportation business in
Texas that transports locally grown vegetables to San Diego, California. The
company owns 5 large rigs and hires local drivers paid fixed salaries
monthly, regardless of the number of trips or tons of cargo that each driver
transports each month. The below table presents details about the number of
drivers and the total cargo transported by the company at different staff
levels.
2. Which inputs are fixed and which are variable in the production function of
Jennifer Trucking Company? Over what ranges do there appear to be
increasing, constant and/or diminishing returns to the number of drivers
employed?
3. What number of drivers appears to be most efficient in terms of output per
driver?
4. What number of drivers appears to minimize the marginal cost of
transportation assuming that all drivers are paid the same salary?
5. The Palms Dry Cleaning Shop in Fort Lauderdale, Florida, faces a highly
seasonal demand for its services, as the snow-birds retirees flock to Florida
in mid-fall to enjoy the mild winter weather and then return to their main
homes in mid-spring. Given this seasonality, Palms tries to keep the
overhead costs as low as possible and therefore, often uses seasonal
contracted labor to man its operations. The following table shows the labor
costs in each month of operation over the past 12 months as well as the total
number of garments that were dry-cleaned in each month. Palms pays fixed
wages per hour to each employee, and we can assume that the costs of other
variable inputs (such as chemicals, electricity, etc) have remained constant.
6. Derive average variable cost (AVC) data from the data in this table.
7. Use gradient analysis to provide an estimate of eleven data points that seem
to represent the MC curve over this range of outputs. Plot these data points
and sketch in estimated MC and AVC curves that seem to best fit these data
points.
8. Suppose that demand is estimated to move from its present (May) level of
3,500 units to 4,000 units next month (June). What is the incremental cost of
meeting this demand?
9. Assuming that Palm’s price to dry clean a garment has been constant at $15
over the past year, and will remain at that level, what contribution to
overheads and profit can it expect in June?
10.Over the past 12 months the Four Winds Novelty Company firm has
recorded its internet sales (equals monthly output levels) and its monthly
total variable costs (TVC) for a particular novelty item as shown in the
following table. Sales have grown over this period with relatively few
shocks due to uncontrollable weather, political and sporting events. This
online retailer carries no inventories; when it receives a pre-paid on-line
order from a customer, it simply buys the product from a supplier and ships
it out to the customer.
11.Using regression analysis, find an equation that best fits the data to represent
the TVC function.
12.At what sales/output level will marginal costs (MC) reach a minimum?
13.Estimate the value of TVC for sales/output level 250,000 units, and calculate
the 95% confidence interval for your estimate
BUS 640 Week 3 DQ 1 Relevant Costs
Relevant Costs. Two partners own together a small landscaping business in North
Carolina, called Summer Lawn Care. They have been specializing in summer grass
seeding, installation, and maintenance. Recently, the partners acquired special
technology and know-how for winter grass installations and maintenance. They
also added a tree cutting service as recent storms in the area had caused demand for
this service to soar. One of the partners insists that the name of the business should
change to Lawn and Tree Care, so that it better reflects the range of services and,
thus, generates more customer interest, and thus contracts. The second partner
wants to keep the old name and argues, “We have already paid for business cards,
vehicle paint, signage, and ads in Yellow Pages”. Evaluate the arguments of the
two partners. Explain and illustrate their points by identifying the relevant and
irrelevant costs for this decision.
BUS 640 Week 3 DQ 2 Contribution Analysis
Contribution Analysis. Explain what is meant by “contribution analysis”. Carefully
define the term and provide examples to illustrate it.
BUS 640 Week 4 Assignment Market Structures and Pricing Decisions
Market Structures and Pricing Decisions Applied Problems. Please, complete the
following 2 applied problems in a Word or Excel document. Show all your
calculations and explain your results. Submit your assignment in the drop box by
using the Assignment Submission button.
A small business which produces plastic vacuum-suction covers for round
household dishes has a monopoly that is protected by a utility patent. The market
demand curve for this product is estimated to be: – 25P where Q is the number of
plate covers per year and P is in dollars. Cost estimation processes have
determined that the firm’s cost function is represented by + 2500Q -0.25*Q2.
(i) What is the profit-maximizing price and output level? Solve this algebraically
for equilibrium P and Q and also plot the MC, D and MR curves and illustrate the
equilibrium point.
(ii) What profit do you expect that the firm will make in the first year?
(iii) Do you expect this profit level to continue in subsequent years? Why or why
not?
2. Greener Grass Company (GGC) competes with its main rival, Better Lawns
and Gardens (BLG), in the supply and installation of in-ground lawn
watering systems in the wealthy western suburbs of a major east-coast city.
Last year, GGC’s price for the typical lawn system was $1,995 compared
with BLG’s price of $2,100. GGC installed 9,130 systems, or about 55% of
total sales and BLG installed the rest. (No doubt many additional systems
were installed by do-it-yourself homeowners since the parts are readily
available at hardware stores.)
GGC has substantial excess capacity—it could easily install 25,000 systems
annually, as it has all the necessary equipment and can easily hire and train
installers. Accordingly, GGC is considering expansion into the eastern suburbs,
where the homeowners are less wealthy. In past years, both GGC and BLG have
installed several hundred systems in the eastern suburbs but generally their sales
efforts are met with the response that the systems are too expensive. GGC has
hired you to recommend a pricing strategy for both the western and east¬ern
suburb markets for this coming season. You have estimated two distinct demand
functions, as follows:
Qw =1,035.548 – 6.07164Pgw + 2.83Pbw + 2,100Ag – 1,500Ab + 0.2348Yw
for the western market and
Qe = 49,714.29 – 30.7692Pge + 6.984Pbe + 1,180Ag – 950Ab + 0.0825Ye
for the eastern market, where Q refers to the number of units sold; P refers to price
level; A refers to advertising budgets of the firms (in millions); Y refers to average
disposable income levels of the potential customers; the subscripts w and e refer to
the western and eastern markets, respectively; and the subscripts g and b refer to
GGC and BLG, respectively. GGC expects to spend $1.5 million on advertising
this coming year and expects BLG to spend $1.2 million on advertising. The
average household disposable income is $55,000 in the western suburbs and
$25,000 in the eastern suburbs. GGC does not expect BLG to change its price from
last year, since it has already distributed its glossy brochures (with the $2,100 price
stated) in both suburbs, and its TV commercial has already been produced. GGC’s
cost structure has been estimated as TVC 5 755.363Q 1 0.005Q2 where Q
represents single lawn watering systems.
1. Derive the demand curves for GGC’s product in each market.
2. Plot graphically the demand and MR curves for each market, and also show
GGC’s combined marginal revenue curve (MR) and its MC curve. Show
graphically the quantities that should be produced and sold, and the prices
that should be charged, in each market.
3. Confirm your quantity and price results algebraically.
4. Calculate the price elasticities of demand in each market and discuss these in
relation to the prices to be charged in each market.
5. Add a short note to GGC management outlining any reservations and
qualifications you may have concerning your price recommendations.
BUS 640 Week 4 DQ 1 Strategic Behavior Oligopolies
Strategic Behavior Oligopolies. An interesting example of strategic behavior
comes from a 1997 article about Microsoft’s investment in Apple (New Straits
Times, 1997). The article is included in the Required Readings list. Facing tough
anti-trust scrutiny from government agencies, Microsoft provided financial support
to Apple in order to ensure Apple’s survival and, therefore, to ensure that
competitiveness in the industry remains. Moreover, the partnership with Apple
provided an additional market for Microsoft’s products – the MS Office and the IE
products were to be bundled with the MAC OS as one of the conditions for this
financing. Discuss this case in the context of market structure and strategic
behavior. What market structure do these firms operate in? Why did Microsoft
need to preserve competitiveness in the industry? What was Microsoft afraid of in
the event that Apple did not survive?
BUS 640 Week 4 DQ 2 Local Market Power
Local Market Power. Bulls Eye department store specializes in the sales of
discounted clothing, shoes, household items, etc. similar to the offerings at a
regular Walmart or Target. Bulls Eye is the only department store in Show Low
and the nearest other discount retailer is Target, located 49 miles away in Eagar.
Bulls Eye, therefore, has some market power in its local area. Despite having some
market power, Bulls Eye is currently suffering losses. An analyst at Bulls Eye is
recommending to the manager to raise prices, so that profitability can be improved.
The manager is unsure of this strategy as recent data points to increasing numbers
of individuals shopping more and more. What are the pros and cons of raising the
prices at Bulls Eye and would that strategy be profitable?
BUS 640 Week 5 Assignment Price Quotes and Pricing Decisions
Price Quotes and Pricing Decisions Applied Problems. Please, complete the
following 3 applied problems in a Word or Excel document. Show all your
calculations and explain your results. Submit your assignment in the drop box by
using the Assignment Submission button.
Maxim Motronics A.G. have been marketing a new product in Europe that has
achieved notable market success and it now plans to introduce this product into the
United States market. The product is an electronic device that is mounted in the
rear window of passenger cars and allows the driver of one vehicle to have a
spoken message converted to text and scrolled across the display panel to be read
by occupants of a following vehicle. This new product can utilize the hands-free
telephone microphone already installed in many new vehicles, or provides this as
free accessory. Maxim expects that demand will be slow at first but will pick up
quickly as automobile accessory stores begin to stock the product and as word-ofmouth promotion spreads awareness. Maxim also plans to produce a humorous
video for posting to YouTube and to utilize social-media marketing to spread
awareness and enthusiasm for the new product. Market demand estimates provided
by Maxim are that the firm expects to sell about 125,000 units into the U.S. market
within 24 months, and that sales per month will start slowly and increase monthly
in the expected diffusion pattern until they stabilize at about 10,000 per month
after month 24. The diffusion curve parameters that fit these assumptions are
shown in the equation + 46.11T2 – 1.352T3, where Q is sales per month and T is
the number of months after the launch into the US market. Maxim’s average
variable cost (AVC) is constant at $62 per unit and he expects to set the profitmaximizing price by applying a 167% mark-up to arrive at his regular price of
$165, since he estimates the demand curve to be – 0.02Q.
1. What introductory price do you recommend Maxim sets for the launch of the
product into the US market, and why? (State any assumptions you need to
make).
2. How might he further adjust the price before raising it to the regular level he
envisions? (Again, state any assumptions you need to make.)
3. What is your advice for Maxim concerning the confirmation of his prior
projections of demand and the shape of the diffusion curve, and the profitmaximizing price, after this new product gains some months of experience
in the U.S. market?
4. Your company, Bright Paints, is one of a dozen companies manufacturing a
special reflective paint used for traffic signs. The State Department of
Transportation has called for tenders to supply 10,000 gallons of blue
reflective paint to be delivered within two months. You can foresee fitting in
a production run of the blue paint and have decided to bid on the job. You
calculate your incremental costs for this job to be $76,200. This particular
contract is standard, similar in all in respects to hundreds of contracts you
have bid on over the past few years. Your pricing policy has been to apply a
mark-up to incremental costs to arrive at the bid price. Your mark-up has
been higher when you had plenty of orders and lower when you had few or
no orders to fulfill. You have assembled data relating the mark-up rate used
and the percentage of contracts won at each mark-up rate, as follows.
5. Why would your company have bid with a zero mark-up on some past
tenders? Why didn’t it win all of those contracts?
6. What is the bid price that maximizes the expected contribution of the
contract?
7. Why, or why not, is the fixed-price mode of bidding likely to be the best one
to use for this contract?
8. In calculating the incremental cost of a particular project, how would you
treat the possible future costs of a lawsuit that may occur as a result of this
project, where the cost of the lawsuit might range from $10,000 to $500,000
with an associated probability distribution?
BUS 640 Week 5 DQ 1 Good Will in Price Bidding
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?
BUS 640 Week 5 DQ 2 New Product Introduction
New Product Introduction. Bayer Schering Pharma AG, Germany owns the AlkaSeltzer, which was launched in 1931 and was meant for relief of minor aches,
pains, inflammation, fever, headache, heartburn, sour stomach, indigestion, and
hangovers. The 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 the TV ad: “The Cold Truth”, (please, watch the ad listed in the
Required Readings)
The ad shows that Alka-Seltzer Plus fights cough, body aches, runny nose,
sneezing and fever, just like Vicks NyQuil does, but it also now can fight
congestion, unlike NyQuil.
Explain how the new 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?
BUS 640 Week 6 Assignment Final Paper A Bakery Business
Research a specific company of your choice and identify some of the managerial
decisions that were made over time and in response to changes in its market or
competitive environment. Use the Ashford University Online Library and webbased sources for your research. At least three external scholarly sources must be
used. Address all of the following areas:
Describe the company and provide a brief history of its operations. Find or use
graphs to illustrate its financial performance over the years.
Identify any sources of risk or uncertainty in its operations. Do the financial reports
indicate risky or uncertain activities or changes to the economic environment that
ultimately appear to have affected the company’s financial outcomes? Be specific.
Are there any government regulations that have affected this company’s operations
domestically or abroad? Explain.
Describe the inputs that are used in this company’s production function and
identify any challenges to securing these inputs.
Determine if the company has introduced new products in existing markets or
created new markets over time. What is the impact on its finances?
Determine if the price of its products increased or declined over time and analyze
the reasons for price fluctuations. Study the demand elasticity for its products and
discuss the availability of close substitutes for its products. How does that affect
pricing decisions?
Analyze the company’s profitability. Identify the economy or industry influences
on its costs, operations, and profitability.
Describe the competitive environment in which the firm operates, the distribution
of market power, and the strategic behavior of the firm and its competitors. Apply
your knowledge of the theory of this company’s market structure. How does the
company make pricing and production decisions? Is your observation supported by
the theoretical models? Refer to the financial reports for illustration.
Identify any non-price competitive strategies that the company might be engaging
in? Provide specific examples.
Evaluate if the company made any mistakes in its decisions over time, and
recommend any changes or improvements for the future operations. Refer to the
financial reports when making specific observations or recommendations.
Use economic language and demonstrate your understanding of the concepts and
theories of this course.
BUS 640 Week 6 DQ 1 Game Theory and Strategic Behavior
Game Theory and Strategic Behavior. Suppose that GE is trying to prevent Maytag
from entering the market for high efficiency clothes dryers. Even though high
efficiency dryers are more costly to produce, they are also more profitable as they
command sufficiently higher prices from consumers. The following payoffs table
shows the annual profits for GE and Maytag for the advertising spending and entry
decisions that they are facing.
Based on this information, can GE successfully prevent Maytag from entering this
market by increasing its advertising levels? What is the equilibrium outcome in
this game?
Suppose that an analyst at GE is convinced that just a little bit more advertising by
GE, say another $2m, would be sufficient to deter enough customers from buying
Maytag, thus, yield less than $0 profits for Maytag in the event it enters. Suppose
that spending an extra $2m on advertising by GE will reduce its expected profits
by $1.5 m, regardless of whether Maytag enters or stays out. Would this additional
spending on advertising achieve the effect of deterring Maytag from entering?
Should GE pursue this option?
BUS 640 Week 6 DQ 2 Sustainable Competitive Advantage
Sustainable Competitive Advantage. Describe the circumstances under which a
firm chooses a low-cost strategy to attain sustainable competitive advantage. What
about the situations when a differentiation strategy is chosen? Provide specific real
world examples.