Jessica Alba, a famous actress, starts the baby and family products business, Th

Question

Jessica Alba, a famous actress, starts the baby and family products business, The Honest Company, with Christopher Gavigan. Alba and Gavigan set up their site so families can choose what kinds of non-toxic, all-natural products they'd like to use and get them in a bundle. Families can choose all kinds of products from food to hygiene necessities and cleaning supplies. Suppose they are thinking of expanding their business into five domestic markets: Phoenix, Dallas, Chicago, New York, and Atlanta. Assume their primary goal of business is to maximize economic profits, although they want to do business honestly.

Show all your calculations and process. Describe your answer for each question in three- to five-complete sentences.

SHOW ALL WORK AND CALCULATIONS>>>PLEASE BE ACCURATE

Explanation / Answer

Problem 1

Penetration pricing occurs when a company launches a low-priced product with the goal of securing market share. But a price skimming strategy is just the opposite. It focuses on maximizing profits by charging a high price for early adopters of a new product, then gradually lowering the price to attract thriftier consumers. Since the company wants to perform the business honestly, they will never compromise with quality. Hence its better to adopt a skimming pricing strategy. Since the company is dealing with non-toxic and all natural products, therefore people are willing to pay a higher price for the product.

Initially they will enjoy higher economic profits because they have adopted a skimming pricing strategy. But in the long run, several other companies will also enter the industry attracted by the high economic profits. As a result, to compete with the potential entrants, Alba and Gavigan have to lower the price of their product. This will end up in lowering the profits in the long run.

In order to earn higher profits in the long run, The Honest Company can acquire the potential entrants and thus enjoy a higher market share. Again the company can indulge in R&D activities and thereby innovate newer products and attract the customers.

Problem 2

From the previous bid patterns of all the rivals, it is observed that the highest bid by any rival is 506000. Now, my bidding pattern suggests of adding 60 to 80% of my incremental cost. My usual practice suggests that the maximum I can bid is 482400 which is still less that the highest bid.

Therefore to win the bid I must bid 506000.

If you want to maximize the expected value of the contribution from this contract, I must bid the minimum. My fully allocated cost is 440000. Therefore I must bid the same to maximize the value of contribution from the contract.

It is said that in the first part, that my company want to win the bid. Therefore it has to bid the maximum. Now, from the bidding practices of the rivals it is observed that Rival C can bid a maximum of 506000. To win the contract I will also bid the same. At the same bid I will win because my capacity utilization is moderate while C

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