Rawlings and Spalding are sports equipment firms that routinely compete against

Question

Rawlings and Spalding are sports equipment firms that routinely compete against each other for the same customers. Rawlings has a goal of increasing market share in the proprietary sports clothing market. Last quarter, Rawlings indeed expanded its market share, but noted that the prices of inputs used to make its proprietary clothing increased. As a result, Rawlings may have to increase prices for its proprietary clothing line by 2 to 5 percent. Rawlings believes that these price increases could undermine their market share gains if Spalding does not also raise prices. Rawlings wants to maintain its newly gained market share in proprietary sports clothing. Therefore, Rawlings plans to keep prices on its clothing line low by raising prices on other products it sells. Evaluate this strategy. Why might this pricing approach actually decrease Rawlings’ profits and earnings per share?

Explanation / Answer

Ans. The type of market both the companies are competing in can be defined as a Oligopoly. If we consider the relatively new market Rawlings has entered into, we can see that Rawlings is having a situation where they either want to increase the share of the new market which is the clothing or work in the new market at the cost of the established market.

Usually in Oligopoly we will face this type of situation where there are only two or three major companies dominating the market, and the companeis try to squeze out the other company with prices. Here Rawling which has entered into a new market, has observed the input cost has increased by 2% to 5% and this will impact the profits of the company as well. According to the current scenario of Rawlings do keep the prices of the clothing line low, and incrase the prices of other sports equipments it sells, there is a chance it will lose its customers. If we put this situation in a model of oligopoly called kinked based demand, we will see if the companyr aise the rpcie beyond a certain level the companies may not foloow, and if reduce the comoanies will follow. So, it could be that the comoany is having that situation, and also do not want to lose the share in that category.

Overall the impact may reduce profit mroe than Rawlings increasing the pice to adjust the rise in the price. There is a chance the cosumer may move out of the market for Rawling which is more establsihed, and the revenue from these parts which maybe at this time th elargest contributors will take a hit, it in a way gives an automatic advantage to Spalding as well. The revenue if reduces followed by already incrased cost of clothing line will eat away the the Operating income, and will reduce the EBIT. The contribution or addition to the share holder equity will reduce as the retained earning will reduce, and this will gradually reduce the earning per share as well.

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