GB540 Unit 6 Pricing Strategy Paper Example

Three Prices That Shipping Cannot Undercut: A Unit 6 Pricing Strategy Paper for an Electric Outboard

[Student Name]

Purdue University Global

GB540: Economics for Global Decision Makers

Unit 6 Pricing Strategy Paper

[Instructor Name]

[Date]

Ruddiman Marine, its costs and every price are composite and illustrative; the economics sources cited are real.

The Opening Table

For each market, the table gives the current price, the delivered marginal cost at next year's planned volume of 3,600 motors, the Lerner index and the elasticity estimate from earlier units.

United States. Price $4,400. Delivered marginal cost $2,998, the plant's $2,458 at 3,600 motors from Unit 4 plus $540 for freight, warranty reserve and the dealer handling fee. Lerner index 0.319. Estimated elasticity minus 2.31, from Unit 3.

Australia. Price AUD 7,400. Landed cost AUD 4,885. Lerner index 0.340. Measured elasticity minus 1.91, from Unit 2.

Norway. Price NOK 49,900. Landed cost about NOK 34,850, or $3,288 at NOK 10.60 to the dollar. Lerner index 0.302. No own-price estimate; the leader prices at NOK 52,900.

What the Lerner Index Implies

A firm maximizing profit sets price so that the Lerner index equals the inverse of the elasticity it faces (Lerner, 1934). Ruddiman's US Lerner index of 0.319 implies an elasticity near minus 3.14. Its estimated elasticity is minus 2.31. Either buyers are far more sensitive than the estimate shows, or the price is too low. Unit 3 found that the estimate, if biased, is likely too small in magnitude, but not by enough to close a gap from 2.31 to 3.14. The same pattern holds in Australia, where the Lerner index implies about minus 2.94 against a measured minus 1.91.

United States

Candidate 1: the constant-elasticity rule. If elasticity stayed at minus 2.31 at every price, the profit-maximizing price would be marginal cost times 2.31 divided by 1.31, or about $5,287.

Candidate 2: the estimated linear demand. The Unit 3 equation is linear in price, which means elasticity rises as price rises. With next season's projected demand of 137 motors per dealer at $4,400 and a slope of minus 0.0745, the profit-maximizing price is half the sum of the price at which demand would reach zero and marginal cost: about $4,618. At that price, the elasticity along the linear curve has risen to about minus 2.85.

Why they differ. The constant-elasticity rule assumes buyers stay as sensitive at $5,287 as at $4,400. The linear curve says they become much more sensitive. At $5,287, the linear curve predicts about 71 motors per dealer, almost half today's sales, and contribution would fall. The linear estimate is grounded in the price range Ruddiman's dealers have actually charged, so it is the better guide.

Recommendation. $4,600. Contribution per dealer rises from about $192,100 to $195,600, about $56,500 across sixteen dealers. The difference between $4,600 and $4,618 is less than $100 per dealer, and a round price is easier for dealers to advertise.

Near the best price the profit curve is flat, so a round price just below the computed optimum gives up almost nothing and avoids pretending to precision the estimate lacks.

Australia

The measured elasticity of minus 1.91, applied to a linear demand curve through current sales of 808 motors at AUD 7,400, puts the profit-maximizing price at about AUD 8,080. That is a 9 percent increase on an estimate from one season and two states.

The paper steps roughly halfway, to AUD 7,740. Contribution rises from about AUD 2.03 million to AUD 2.10 million, and the full step to AUD 8,080 would add only about AUD 24,000 more. The halfway step tests the estimate with a smaller risk, and the next season's sales will show whether buyers respond as the promotion suggested.

Norway

Without an own-price estimate, Norway's price is set by structure. Unit 5 found a dominant firm with a fringe: the leader prices at NOK 52,900, and the fringe prices below it. Ruddiman's current price leaves NOK 3,000 of room. Moving to NOK 51,500 keeps Ruddiman below the leader by NOK 1,400, enough to remain the cheaper alternative for buyers who compare. Using the US elasticity as a rough proxy, sales would fall from about 600 motors to 556, and contribution would rise from about $851,700 to $872,500. The proxy is labeled as such, and the Norwegian distributor will report weekly sales so the estimate can be replaced.

Can Motors Move Between Markets?

A price gap between markets invites unauthorized dealers to buy where motors are cheap and resell where they are dear. Ahmadi and Yang (2000) describe how such parallel imports exploit cross-market price differences, and how they can erode a manufacturer's ability to price differently by market.

Converted to dollars at current rates, the three recommended prices are $4,600 in the United States, about $5,092 in Australia at AUD 1.52 to the dollar, and about $4,858 in Norway. The largest gap, between Australia and the United States, is about $492. Shipping a motor between markets, with crating, freight, duty and the cost of providing warranty service outside the authorized network, costs about $700. No gap exceeds that cost, so buying in one market to resell in another would lose money.

What Dealers Will Need

Because each dealer chooses its discount inside a permitted range, a list price change reaches buyers only if dealers pass it on. The US dealer band should move with the list price, from $4,250 to $4,550 at the bottom, so that the average selling price rises by roughly the same $200. Dealers will want a reason for the change they can give customers, and the most honest one is that the motor's price has not risen in three seasons while battery capacity has improved. In Australia and Norway, the distributors set retail prices with Ruddiman's agreement, and the new prices should take effect at the start of the season rather than mid-season, when a change would look opportunistic.

Risks

If the Chinese maker cuts its US price again, the US elasticity may rise and $4,600 may prove too high; the price should be reviewed after the first month of the season. If the Australian dollar weakens, the AUD price may need to rise further, a question Unit 9 examines. If the Norwegian leader holds its price, the gap narrows to NOK 1,400 and should not narrow further.

Summary

Raise the US price to $4,600, the Australian price to AUD 7,740 and the Norwegian price to NOK 51,500. Bijmolt et al. (2005) found brand-level elasticities averaging near minus 2.62, so none of the three markets is assumed to be unusually insensitive to price. Each step is smaller than the computed optimum where the evidence is weaker, and the three together stay inside the cost of moving motors between markets.

References

Ahmadi, R., & Yang, B. R. (2000). Parallel imports: Challenges from unauthorized distribution channels. Marketing Science, 19(3), 279-294. https://doi.org/10.1287/mksc.19.3.279.11799

Bijmolt, T. H. A., van Heerde, H. J., & Pieters, R. G. M. (2005). New empirical generalizations on the determinants of price elasticity. Journal of Marketing Research, 42(2), 141-156. https://doi.org/10.1509/jmkr.42.2.141.62296

Lerner, A. P. (1934). The concept of monopoly and the measurement of monopoly power. The Review of Economic Studies, 1(3), 157-175. https://doi.org/10.2307/2967480