ASSIGNMENT SUBMISSION FORM Course Name:
Economics of Strategy
Assignment Title:
Judo Economics
Section:
C
Submitted by:
Group 33 Group Member Name Abhiram Reddy Ashley Cousins Nicolas Fiore Rini Upadhyay Vennela Gandikota Vishal Gupta
PG ID 61710454 61719019 61719020 61710667 61710200 61710454
1. Suppose that: (a) each buyer has a willingness-to-pay of $200 for one unit of either the incumbent’s or the entrant’s product; and (b) both incumbent and entrant have a $100 unit cost of serving buyers. Formulate a strategy for the entrant. How much money can the entrant make? Solution: Let ‘N’ be the number of customers captured by entrant. Let ‘P’ be the price of entrant. Cost of serving buyers for entrant = $100 Profit of entrant = (P-100)*N
----------------------------------------------------------------- (1)
Now, if incumbent fights, it will keep its price just below the price of entrant. Taking the price of incumbent equal to P, Profit of incumbent if it fights = (P-100)*100
----------------------------------------------- (2)
If incumbent accommodates the entrant, it will keep the price as $ 200. Therefore, Profit of incumbent if it accommodates the entrant = (200-100)*(100-N) Now, for entrant’s strategy to be successful, Profit of incumbent if it accommodates the entrant > Profit of incumbent if it fights
--- (3)
Making the two equations equal, (P-100)*100 = (200-100)*(100-N) N+P = 200 --------------------------------------------------------------------------------------------------(4) Now, entrant would want to maximize its profits. Therefore, Substituting (4) in (1), (P -100) * (200-p) Maximize Differentiating with respect to P and solving, we get P = 150 ---------------------------------------------- (5) Substituting (5) in (4), we get N = 50 ------------------------------------------------------------------------------ (6) Profit of entrant = 50 * 50 = $2500
2. Now suppose that: (a) each buyer has a willingness-to-pay of $200 for one unit of the incumbent’s product and $160 for one unit of the entrant’s product, and (b) the incumbent has a $100 unit cost and the entrant a $120 unit cots. Formulate a strategy for the entrant. How much money can the entrant make? Solution: Let ‘N’ be the number of customers captured by entrant. Let ‘P’ be the price of entrant. Cost of serving buyers for entrant = $120 Cost of serving buyers for incumbent = $100 Profit of entrant = (P-120)*N
----------------------------------------------------------------- (1)
Now, if incumbent fights, it will keep its price comparable to the price of entrant. Since willingness to pay of customers is $40 more for incumbent than for entrant, incumbent can charge a price of (P + 40) Profit of incumbent if it fights = (P + 40 - 100)*100 ----------------------------------------------- (2)
If incumbent accommodates the entrant, it will keep the price as $ 200. Therefore, Profit of incumbent if it accommodates the entrant = (200-100)*(100-N)
--- (3)
Now, for entrant’s strategy to be successful, Profit of incumbent if it accommodates the entrant > Profit of incumbent if it fights Making the two equations equal, (P - 60)*100 = (200-100)*(100-N) N+P = 160 --------------------------------------------------------------------------------------------------(4) Now, entrant would want to maximize its profits. Therefore, Substituting (4) in (1), (P -120) * (160-p) Maximize Differentiating with respect to P and solving, we get P = 140 ---------------------------------------------- (5) Substituting (5) in (4), we get N = 20 ------------------------------------------------------------------------------ (6) Profit of entrant = 20 * 20 = $400
3. Finally, suppose that: (a) each buyer has a willingness-to-pay of $200 for one unit of either the incumbent’s or the entrant’s product; and (b) the incumbent has a $120 unit cost and the entrant an $80 unit cost. Formulate a strategy for the entrant. How much money can the entrant make this time? Solution: Let ‘N’ be the number of customers captured by entrant. Let ‘P’ be the price of entrant. Cost of serving buyers for entrant = $80 Cost of serving buyers for incumbent = $120 Profit of entrant = (P-80)*N
----------------------------------------------------------------- (1)
Now, if incumbent fights, it will keep its price just below the price of entrant. Taking the price of incumbent equal to P
Profit of incumbent if it fights = (P - 120)*100
----------------------------------------------- (2)
If incumbent accommodates the entrant, it will keep the price as $ 200. Therefore, Profit of incumbent if it accommodates the entrant = (200-120)*(100-N)
--- (3)
Now, for entrant’s strategy to be successful, Profit of incumbent if it accommodates the entrant > Profit of incumbent if it fights Making the two equations equal, (P - 120)*100 = (200-120)*(100-N) 4N+5P = 1000 --------------------------------------------------------------------------------------------------(4) Now, entrant would want to maximize its profits. Therefore, Substituting (4) in (1), (P -80) * [(1000 – 5P)/4] Maximize Differentiating with respect to P and solving, we get P = 140 ---------------------------------------------- (5) Substituting (5) in (4), we get N = 75 ------------------------------------------------------------------------------ (6) Profit of entrant = 60 * 75 = $4500