Vacuum cleaning a house is arguably one of the most onerous tasks which the owner or cleaner of the property has to perform on regular basis. There are many types of vacuum cleaners available, including upright, canister, stick or handheld models. Different types and models have different functionality and prices differ significantly as well. Vacuuming however remains an unpopular house cleaning task.
Zirtech (Pty) Ltd is the manufacturer of a very popular canister type household vacuum cleaner and has been the market leader for this type of appliance for years. Zirtech management is very comfortable with the leadership position the company holds in the market and it invests regularly in improving the functionality of its canister type vacuum cleaners of which there are three different models based on electric motor size.
Norco Incorporated is also a supplier of household vacuum cleaners and is constantly competing against the other manufacturers for market share, Zirtech being its main competitor. Norco's management recognises that Norco is not in a position to reduce the prices of its standard type vacuum cleaners in order to gain market share. Such a strategy will start a price war and Zirtech has the financial capacity to emerge as the victor, leaving Norco worse off than before.
Norco has however recently bought the patent rights of a revolutionary robot vacuum cleaner from Innovations Ltd, a designer and developer in the field of robotics. The Dazzler Pro robot vacuum cleaner is described as follows: "The advanced laser guided navigation and powerful suction ensure that the Dazzler Pro goes automatically from room to room, cleaning close to edges, in corners, and carefully around furniture. It returns to the charge base and resumes where it left off! It offers easy scheduling of daily cleaning or a button for instant cleaning. It can clean as much as 100m2 of floor space in 40 minutes. It is powerful, intelligent, automatic and delivers high performance."
Norco launched the Dazzler Pro five months ago and sales had been growing exponentially since the launch. The new robot vacuum cleaner has taken the market by storm and Zirtech's sales of specifically its leading brand canister type vacuum cleaner, the Zapit20, has reduced significantly because of the entrance of the Dazzler Pro into the market. The Dazzler Pro is priced in the price range of the ZAPIT model, making pricing an issue for Zirtech.
ZAPIT's management is very concerned about the impact that the Dazzler Pro has had and is having on the demand for its own vacuum cleaners, particularly the leading model. They have requested your assistance to analyse the demand and supply scenarios for the ZAPIT20, as well as the DazzlerPro and indicate to them the course of action they should consider.
Additional information
Assume that:
- The markets for both products are currently in equilibrium.
- There are many suppliers making this a market of perfect competition.
ECO500 Managerial Economics Vxiv
- Changes in demand and supply are in equal proportions.
- Neither company wants to start a price war.
- The demand for the Dazzler Pro is expected to continue to grow by an estimated 30% per month for the foreseeable future, eroding the Zapit20 market.
- The industry defines "short-term" as a period of eight months.
Required
1.1. Prepare a graph that demonstrates the equilibrium position for the Zapit20, as well as any short-term changes that you expect to occur with respect to the supply and demand status of this product in the short-term, based on the information provided. Ensure that you correctly label each aspect of the graph.
1.2. Explain the short-term changes in the market for Zapit20 with reference to the graph presented in 1.1 above, starting from the point of equilibrium.
1.3. Prepare a graph that demonstrates the equilibrium position for the Dazzler as well as any short-term changes that you expect to occur with respect to the supply and demand status of this product in the short-term, based on the information provided. Ensure that you correctly label each aspect of the graph.
1.4. Explain the short-term changes in the market for Dazzler with reference to the graph presented in 1.3 above, starting from the point of equilibrium.
1.5. Prepare a graph that demonstrates any changes that Zirtech's management can expect in the long-term supply and demand for Zapit20, based on the information provided.
1.6. Explain the changes expected with reference to the graph presented in 1.5 above, starting from the short-term position
1.7. Prepare a graph that demonstrates any changes that Zirtech's management can expect in the long-term supply and demand for Dazzler, based on the information provided.
1.8. Explain the changes expected with reference to the graph presented in 1.7. above, starting from the short-term position.