Activity: Determining Wanda's Optimal Price Based on Kit's Expected Price
To determine her optimal price, Wanda must engage in a strategic analysis that is contingent on her competitor's actions. The process begins with forming an expectation about the price Kit will set—for instance, assuming he will choose a high price (H). Based on this specific expectation, Wanda then uses the available demand information to calculate her own potential profits for each of her pricing options, a low price (L) and a high price (H). The final step is to compare these calculated profits and select the price that yields the highest return for her business.
0
1
Tags
Social Science
Empirical Science
Science
Economy
CORE Econ
Economics
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.7 The firm and its customers - The Economy 2.0 Microeconomics @ CORE Econ
Related
Activity: Determining Wanda's Optimal Price Based on Kit's Expected Price
Player Preference for the High-Price Equilibrium in the Windsurfing/Kitesurfing Game
Pricing Trade-off in the Windsurfing/Kitesurfing Game
Figure 7.24: Demand and Profit Payoffs in the Wanda-Kit Pricing Game
The Windsurfing/Kitesurfing Game as a Coordination Game
Describing Market Disequilibrium
Two firms, Wanda's Windsurfing and Kit's Kitesurfing, compete on price. Each firm can set either a high price of €36 or a low price of €20. The cost to rent out one board is €10 for both firms. Market demand depends on the prices both firms choose. Specifically, if one firm sets a low price and the other sets a high price, the low-price firm rents to 49 customers, while the high-price firm rents to 11 customers. Given this, calculate Wanda's daily profit if she sets a low price (€20) and Kit sets a high price (€36).
Two firms, a windsurfing rental shop and a kitesurfing rental shop, are the only providers in a local market. Each must decide whether to set a high price (€36) or a low price (€20) for a daily rental. The cost for each rental is €10. The market consists of some customers who are loyal to one sport regardless of price, and others who are price-sensitive and will choose the cheaper option. What is the fundamental strategic trade-off each firm faces when setting its price?
Two competing watersport rental shops, one for windsurfing and one for kitesurfing, must each decide whether to set a high price (€36) or a low price (€20) for a daily rental. The cost per rental is €10 for both. The market's response to their pricing is as follows:
- If both set a high price, they collectively rent to 40 customers.
- If both set a low price, they collectively rent to 60 customers.
- If one sets a high price and the other a low price, the high-price shop rents to 11 customers and the low-price shop rents to 49.
Analyze these outcomes to determine which pricing combination generates the highest total profit for the entire market (i.e., the sum of both shops' profits).
Worst-Case Profit Analysis in a Pricing Game
Two competing watersport rental shops, one for windsurfing and one for kitesurfing, operate in a market with 60 potential customers. When one shop sets a high price and the other sets a low price, the shop with the high price rents to 11 customers, while the shop with the low price rents to 49 customers. What does this specific outcome reveal about the nature of the customers in this market?
Two competing firms, a windsurfing shop and a kitesurfing shop, must decide whether to set a high price (€36) or a low price (€20) for a daily rental. The cost per rental is €10 for both.
- If the windsurfing shop sets a high price while the kitesurfing shop sets a low price, the windsurfing shop rents to 11 customers.
- If both shops set a low price, they split the market of 60 customers equally.
Given this information, if the windsurfing shop manager believes the kitesurfing shop will set a low price, which pricing strategy should the windsurfing shop choose to maximize its own profit, and what will that profit be?
Evaluating a Pricing Strategy Claim
Impact of a Cost Change on Profitability
Two competing watersport rental shops, one for windsurfing and one for kitesurfing, are currently both charging a high price of €36 per day. At this price, they share the market of 40 customers equally. The cost per rental is €10. If the windsurfing shop unilaterally decides to lower its price to €20, it will attract 49 customers. What is the net effect on the windsurfing shop's daily profit from making this price change?
Two competing watersport rental shops, one for windsurfing and one for kitesurfing, must each decide whether to set a high price (€36) or a low price (€20) for a daily rental. The cost per rental is €10 for both. The market's response to their pricing is as follows:
- If both set a high price, they collectively rent to 40 customers.
- If both set a low price, they collectively rent to 60 customers.
- If one sets a high price and the other a low price, the high-price shop rents to 11 customers and the low-price shop rents to 49.
Analyze these outcomes to determine which pricing combination generates the highest total profit for the entire market (i.e., the sum of both shops' profits).
Learn After
Wanda's Profit Calculation with Low Price vs. Kit's High Price
Competitor-Based Pricing Decision
Wanda runs a business in direct competition with Kit's company. They each must decide whether to set a high or a low price. The table below shows the profit Wanda will earn under each possible pricing combination.
If Kit Prices High If Kit Prices Low Wanda Prices High $10,000 $4,000 Wanda Prices Low $12,000 $6,000 Based on her market analysis, Wanda believes Kit is most likely going to set a low price. Given this belief, what pricing strategy should Wanda choose to maximize her profit, and what will that profit be?
Wanda and Kit are competitors, each deciding to set a high or low price. The table below shows the profit Wanda will earn based on the combination of their decisions.
If Kit Prices High If Kit Prices Low Wanda Prices High $10,000 $4,000 Wanda Prices Low $12,000 $6,000 Statement: Regardless of whether Kit sets a high or a low price, Wanda's most profitable choice is to set a low price.
Competitor Price Expectation and Profit Maximization
Wanda runs a business selling widgets and has one competitor, Kit. Both must decide whether to set a high price ($20) or a low price ($15). Wanda's cost to produce one widget is $10. The number of widgets Wanda will sell depends on both her price and Kit's price, as shown in the table below:
If Kit Prices High If Kit Prices Low Wanda Prices High 100 units 50 units Wanda Prices Low 150 units 80 units Wanda's management team has concluded that Kit is most likely going to set a High Price. Based on this single assumption, what is Wanda's profit-maximizing pricing strategy?
A business owner must decide on her product's price while considering the price of her only competitor. To make a profit-maximizing decision based on her expectation of the competitor's choice, she must follow a logical sequence of steps. Arrange the following actions into the correct order that the business owner should follow, assuming she has already gathered all the necessary market data on potential sales and profits for every pricing combination.
Analysis of Strategic Pricing Scenarios
Innovate Inc. competes directly with Future Corp. Both must decide whether to set a high or low price for their similar products. The table below shows the profit Innovate Inc. will earn under each possible pricing combination. Based on this data, match each strategic assumption Innovate Inc. might make about Future Corp.'s actions with the corresponding profit-maximizing price for Innovate Inc.
If Future Corp. Prices High If Future Corp. Prices Low Innovate Inc. Prices High $100,000 $30,000 Innovate Inc. Prices Low $80,000 $40,000 BeanBrew and MugShot are the only two coffee shops in a small town, and each must decide whether to set a high or low price for their lattes. The table below shows the daily profit BeanBrew will earn based on the combination of their pricing decisions.
If MugShot Prices High If MugShot Prices Low BeanBrew Prices High $500 $150 BeanBrew Prices Low $650 $200 BeanBrew's market analysis indicates that MugShot is almost certain to set a High Price. Following a profit-maximizing strategy based on this expectation, BeanBrew's optimal daily profit will be $____.
A firm, 'Innovate Inc.', is deciding whether to set a high or low price for its product. Its only competitor is 'Future Corp.'. The table below shows Innovate Inc.'s potential profits based on the pricing decisions of both companies. However, one profit outcome is currently unknown and is represented by 'X'.
If Future Corp. Prices High If Future Corp. Prices Low Innovate Inc. Prices High $50,000 X Innovate Inc. Prices Low $60,000 $20,000 Innovate Inc.'s analysts have concluded that it is very likely Future Corp. will set a Low Price. Based on this assumption, they recommend that Innovate Inc. should set a High Price to maximize profit. For this recommendation to be correct, what must be true about the value of 'X'?