Case Scenario:
You are a pricing manager at Argyle Inc. a medium sized firm that recently introduced a new product into the market. Argyle’s only competitor is Baker Company, which is significantly smaller than Argyle. The Management of Argyle has decided to pursue a short term strategy of maximizing this quarter’s revenues, and you are in charge of formulating a strategy that will permit the firm to do so. After talking with an employee who was recently hired from the Baker company, you are confidant that (a) Baker is constrained to charge $10 or $20 for its product, (b) Baker’s goal is to maximize this quarter’s profit, and (c) Baker’s relevant unit costs are identical to yours. You have been authorized to price that product at two possible levels ($5 or $10) and know that your relevant costs are $2 per unit. The marketing department has provided the following information about the expected number of units sold (in millions) this quarter at various prices to help you formulate your decision:
|
Argyle Price
|
Baker Price
|
Argyle Quantity
|
Baker Quantity
|
|
$5
|
$10
|
3
|
2
|
|
5
|
20
|
3
|
1
|
|
10
|
10
|
1
|
2
|
|
10
|
20
|
1
|
1
|
Argyle and Baker currently set prices at the same time. However, Argyle can become the first mover by spending $2 million on computer equipment that would permit it to set its price before Baker. Determine Argyle’s optimal price and whether you should invest the $2 million.