You are the manager of a firm that manufactures front and rear windshields for t

Question

You are the manager of a firm that manufactures front and rear windshields for the automobile industry. Due to economies of scale in the industry, entry by new firms is not profitable. Toyota has asked your company and your only rival to simultaneously submit a price quote for supplying 100,000 front and rear windshields for its new Highlander. If both you and your rival submit a low price, each firm supplies 50,000 front and rear windshields and earns a zero profit. If one firm quotes a low price and the other a high price, the low-price firm supplies 100,000 front and rear windshields and earns a profit of $9 million and the high-price firm supplies no windshields and loses $1 million. If both firms quote a high price, each firm supplies 50,000 front and rear windshields and earns a $7 million profit. Determine your optimal pricing strategy if you and your rival believe that the new Highlander is a

Explanation / Answer

The optimal pricing strategy is to quote a low price because: 1) If you quote high price, order may go to a rival and you may loose $1 million 2) If both quotes high price, then you may earn $ 7 million 3) if you quote low price, then you may earn $ 9 million 4) if both quotes low price, then you may not earn anything Assuming that it is a one-time order, the strategy should be provide a low price, so that you will either earn $ 9 million or you earn nothing. Had it not been a one time order, then the pricing straegy should be different as even if you take a hit on your profit for the initial year you may benefit in the future If the quote, is required year after year, then every year the pricing strategy has to be different depending upon the prevailing market conditions and watching the rival in the previous year. Hope this clarifies Happy to help

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