Evaluating a Pricing Strategy Claim
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 split a total of 40 customers equally.
- If both set a low price, they split a total of 60 customers equally.
- 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.
The manager of the windsurfing shop claims: 'No matter what our competitor does, our best strategy is to set a low price. A lower price guarantees we will attract more customers, and more customers always leads to higher profit.'
Evaluate the manager's claim. Is the statement entirely correct? Justify your conclusion with profit calculations for each possible scenario.
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
Evaluation in Bloom's Taxonomy
Cognitive Psychology
Psychology
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).