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Managerial Economics 2nd Edition by William Boyes
Edition 2ISBN: 978-0618988624Managerial Economics 2nd Edition by William Boyes
Edition 2ISBN: 978-0618988624 Exercise 10
Pricing Chips
A Phoenix tortilla chip producer enjoyed a competitive advantage over a national brand. Its price was lower and its quality higher than the national brand's chip. Nevertheless, the local chip maker watched the national company very carefully because of its huge size relative to the local firm. Thus, when the national company upgraded its chip, the Phoenix firm believed it had to respond. It chose to reduce the quality so that its costs would be lower. It believed that in this way it could maintain its price advantage. A specific size of the national brand's potato chips was priced at $1.59 while a comparable size of the local brand was $1.29, a difference of 30 cents. Over time, the price of the national brand increased to $1.89. The local brand followed the lead of the national brand but maintained its 30 cent price differential by raising its price to $1.59. These changes caused the local company to go out of business.
Why would equal price increases on two products lead consumers to purchase more of the higher-priced product and less of a relatively lower?priced product?
A Phoenix tortilla chip producer enjoyed a competitive advantage over a national brand. Its price was lower and its quality higher than the national brand's chip. Nevertheless, the local chip maker watched the national company very carefully because of its huge size relative to the local firm. Thus, when the national company upgraded its chip, the Phoenix firm believed it had to respond. It chose to reduce the quality so that its costs would be lower. It believed that in this way it could maintain its price advantage. A specific size of the national brand's potato chips was priced at $1.59 while a comparable size of the local brand was $1.29, a difference of 30 cents. Over time, the price of the national brand increased to $1.89. The local brand followed the lead of the national brand but maintained its 30 cent price differential by raising its price to $1.59. These changes caused the local company to go out of business.
Why would equal price increases on two products lead consumers to purchase more of the higher-priced product and less of a relatively lower?priced product?
Explanation
Verified
Verified
Case summary:
Company P is a chip produ...
Managerial Economics 2nd Edition by William Boyes
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