Evaluating a Strategic Pricing Decision
Two companies, AeroSail and BoardBlast, are the only producers of a specialized type of surfboard. They have both been setting a high price for their products, resulting in a stable outcome where each earns a profit of $100,000 per quarter. There is another stable outcome where both firms set a low price, in which case each would only earn $30,000 per quarter. If one firm unilaterally lowers its price while the other maintains a high price, the low-pricing firm earns a temporary profit of $120,000 for that quarter, while the high-pricing firm's profit falls to $10,000.
A new consultant for AeroSail advises the company to unexpectedly lower its price to capture the $120,000 profit. Critically evaluate this advice. In your response, explain why AeroSail's leadership should be cautious about this strategy, justifying your position by analyzing the potential long-term consequences versus the short-term gain.
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