Price Quotes And Pricing Decisions Case Study Samples

Problem 1

Question 1
A skimming price is a price that is set high so as to enable the maximization of profits. New products in the market can be given high prices if the intention of the company is to make profits within each period of production. It is usually advisable to set the skimming price at a price that is similar to the profit-maximization price in the short run. A price that is higher or lower than the profit-maximization price will not result into higher profits. The disadvantage of this pricing strategy is that profit can only be maximized in the short-run because new entrants into the market will come with low cost products.
Penetration price is a price that is set low so as to enable the business to sell more products with the intention of penetrating the market. The penetration pricing strategy leads to maximization of profits in the long run. The company is able to achieve maximum profits by producing more units and selling them to many customers. Setting a low price prevents the entry of other firms into the market because the new firms incur high costs of production and are not ready to make losses.
I would advice Alba and Gavigan to choose the penetration price because they plan to expand their business into other markets. Their plans show that they are not in the market for a short time. They will need to acquire more customers by selling to them low priced products. They will benefit in the long run because it will be hard for other firms to enter the market. They can maximize profits by producing more units in an efficient manner. The skimming price is not a good idea because it will make it easier for new firms to enter the market and force them to lower their prices so as to remain in the market.

Question 2

Alba and Gavigan are operating in a monopolistic market where there are many rivals in the market. If they set the price of their products at a very low price, they can end up making losses. It is advisable for them to set their prices at the short-run price maximization level so that they can make economic profits in the short run as they wait for the fall of prices with the entry of new firms. They can then adjust their prices to the penetration level so as to discourage more firms from entering the market.
They can continue making economic profits in the long term as they focus on producing more units and selling them at low prices. They will get more customers, and benefit from economies of scale. In the long run, other firms will leave the market due to losses associated with high pricing and loss of market share. Alba and Gavigan can then maximize their profits based on the large market share they hold.

Question 3

I would advise Alba and Gavigan to produce more output of their products so as to cover the costs of production without making losses. Producing large volumes of products will enable the company to learn faster ways of selling and more efficient methods of production. It will result in an increase in the profit margin. Alba and Gavigan will also reduce their cost of production by producing large quantities. They can enjoy purchasing economies by buying raw materials in bulk. The costs will be spread over a larger product line. The unit cost of each product will be low because the large number of products will share the total cost. The company will also enjoy the benefits of return customers due to the satisfaction they get from using the products.

Problem 2

Question 1
If I must win the project I will have to bid at price that is lower than that offered by the other rivals. To determine the price it is important to first determine the bidding prices of the other rivals.

Rival A

Incremental price = 110% x 268,000 = 294,800
Full costs = 440,000
Total cost = 294,800 + 440,000
= $734,800

Price at the lowest bid:

Incremental costs = 135% x 294,800 = 397,980
Full cost = 440,000
Total cost = 397,980 + 440,000
= $837,980

Price at the highest bid:

Incremental costs = 150% x 294,800 = 442,200
Full cost = 440,000
Total cost = 442,200 + 440,000
= $882,200

Rival B

Incremental price = 268,000
Full costs = 440,000
Total cost = 268,000 + 440,000
= $708,000

Price at the lowest bid:

Incremental costs = 268,000
Full cost = 108% x 440,000 = 475,200
Total cost = 268,000 + 475,200
= $743,200

Price at the highest bid:

Incremental costs = 268,000
Full cost = 112% x 440,000 = 492,800
Total cost = 268,000 + 492,800
= $760,800

Rival C

Incremental price = 80% x 268,000 = 214,400
Full costs = 440,000
Total cost = 214,400 + 440,000
= $654,400

Price at the lowest bid:

Incremental costs = 214,400
Full cost = 110% x 440,000 = 484,000
Total cost = 214,400 + 484,000
= $698,400

Price at the highest bid:

Incremental costs = 214,400
Full cost = 115% x 440,000 = 506,000
Total cost = 214,400 + 506,000
= $720,400
If I must win the bid, my bidding price should be placed beneath the lowest bidding price of the three rivals. Rival C has the lowest bidding price at a total of $698,400. Placing a price beneath $698,400 will mean that I will win the bid, but end up making losses. The price is lower than my total cost which is at $708,000 (268,000 + 440,000). We refer to this as a winner’s curse. It does not make sense to win a bid and end up making losses. There are indications that rival C will place a higher price than its lowest possible bid because it is not concerned about goodwill. Rival C is a well established company and does not need to set low prices so as to attract buyers. Another reason for rival C to place a higher bid is based on the fact that the company is more interested on contracts that require creativity, and in this case the contract job is standardized in a particular manner. I can take a gamble based on the facts about rival C and place my bidding price at $718,720 which is derived when I add 4% to my incremental costs instead of the usual 60% to 80%.
Question 2
Incremental price = 268,000
Full costs = 440,000
Total cost = 268,000 + 440,000
= $708,000

Price at the lowest bid:

Incremental costs = 160% x 268,000 = 428,800
Full cost = 440,000
Total cost = 428,800 + 440,000
= $868,800

Price at the highest bid:

Incremental costs = 180% x 268,000 = 482,400
Full cost = 440,000
Total cost = 482,400 + 440,000
= $922,400
Value at low bidding price = $868,800 - $708,000 = $160,800
Value at high bidding price = $922,400 - $708,000 = $214,400
If I wanted to maximize my expected value from the contract, my bidding price would be $922,400. Am aware that there is a lot of competition, and I have to bid in a way that would enable me to attract the buyer for consideration. Some of the values that the other bidders possess indicate that they might not be very interested in the contract. Rival A does not like winter jobs and yet the job of this contract will be executed during winter. The bidder of rival B is looking for another job, meaning that he is not very much interested in a contract that would hold him in the company. Rival C is used to accomplishing creative works, and yet this contract job demands a very specific and standardized government design.
Question 3
There are some assumptions that have been made to defend these answers. The full cost of rival A has been taken as 440,000 which is the same as that of my firm. Rival C has been assumed to set its price at the highest bid because it has a better chance of winning the bid and it can make more profits at that price. The rival firms have been assumed to stick within their usual bidding pattern.