QUESTION 1 The following four tyre companies each produce a different product, a

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QUESTION 1 The following four tyre companies each produce a different product, and although their raw materials are exactly the same, the competition and demand for each market is quite different Company A produces standard car tyres; demand is high but there are lots of established competitor brands including a few large-scale producers that control prices Company B produces special tyres for army tanks; they are contracted by the government, and so they have only one customer and no competitors but the contract will be reviewed annually Company C produces tyres for four-wheel-drive vehicles, demand is lower than for standard car tyres, but there is less competition Company D produces tyres for fixed-gear bicycles; a growing market with few established competitors but with a growing number of new producers entering the market to meet growing consumer demand i. Thinking about the different price setting methods that companies could use to set their prices, select one pricing method for each firm and explain why you think this would be the most appropriate method ii. Thinking about the differences in the customer base for each product which types of tyres would be more price elastic and why? ii. The cost of Carbon Black (one of the key raw materials used to make tyres) has increased significantly, causing an increase in the production costs for all four tyre companies a. Would this be an increase in fixed costs or variable costs? b. If all four companies raised their prices in response to the increased production cost, whose sales do you think would be most affected and why? iv Company A is considering a temporary price promotion- list some scenarios where this could be a benefit for the company. List some reasons why a temporary price promotion may not be profitable

Explanation / Answer

i. Company A will have to use "competition based pricing" as it has to compete and survive in the market with a number of big and small manufacturers. The price needs to be competitive and attractive to customers since there are number of choices available.

Company B will need "other pricing method" which will be the going rate in the market and value return for the product sold. The product pricing has to match the cost plus reasonable margin to be acceptable for government purchase.

Company C will need cost based pricing to ensure it doesn't suffers loss as the demand for four wheel vehicle tyre is less than that of cars.

Company D will be better off with demand pricing method wherein the price can fluctuate on the basis of market demands. At times of lean demand, the price can be lowered a bit to attract consumers. Similarly when the demand is stable, the same can be increased to meet the market requirement.

ii. Standard car tyre would be more price elastic as the demand for this kind of tyre is highest and there are a number of players in the market. Slight price change may result in consumer shift to another comparable product and brand.

iii. a. The increase in cost of carbon black will affect variable costs since raw material prices fluctuate. Fixed costs pertain to costs which are static for a longer period of time like salaries, rents and electricity charges etc.   

b. Company A's sales will be most affected upon increased sale prices of standard car tyre. The segment is dominated by large and small scale industries where the larger companies have the capacity to influence price. They are in a better position to absorb a part of increased input cost and offer the product at little cheaper price to consumers. The smaller companies would have difficulty in matching this.

iv. Price promotion would be beneficial to Company A to clear its stock at old prices when new increased prices are offered by competition. It can promote sale by declaring "sale price to soon increase - sale at old prices till stocks last" and clear the existing stock at same price as soon as new price are offered by competition. In another scenario, price promotion can be offered for a limited period with new stock offered at old price.

Temporary price promotion may not be profitable as even though company may generate good sale but at a lower sale price that will reduce its profit. Secondly, it will further suffer in case established competition picks up the strategy and offers same benefit for a longer duration. While the established players would have a capacity to stretch the offer longer, Company A may not be in a position to do so for long. This will result in two scenarios. 1) The gains of temporary price promotion will be negated with the same offer available elsewhere too and; 2) The established player/s may continue price promotion longer while Company A will have to discontinue much earlier. This will result in lower sales since the larger companies would continue to offer products at a lower price.  

  

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