Question

You are advising the stakeholders of a small firm that is one of a handful of manufacturers of disposable contact lenses, wetting solution and other products related to eye care. The stakeholders are wrestling with a proposal to implement a price increase for some, all, or a large number of their products. They all agree that doing so can help offset recent cost increases the firm has experienced, but there the agreement ends.

Some favor a small price increase for products across the board, noting that, from the standpoint of the market, demand for healthcare products is relatively inelastic. Others believe that strategy could backfire, hurting more than helping. Instead, they argue, there are a number of factors to consider—the strength of the economy, their competition, trends in the market for specific types of products, and so on. They believe, therefore, products or types of products should be considered on a case-by-case basis: while a price increase for one product might yield positive results, a price increase for another might wipe out any gain achieved by the first.

What would you say to these stakeholders? Formulate your advice, drawing on course readings, other scholarly sources, and the concept of healthcare price elasticity.

Answer 1

Whether the total revenue of the firm will increase or decrease after price rise will depend on price elasticity of demand. If the demand for the product is inelastic, then any increase in the price of the product will lead to increase in total revenue of the firm and any decrease in the price of the product will lead to fall in total revenue of the firm.

Thus, it is necessary to compute the demand function of the firm and calculate price elasticity of demand of the goods manufactured by the firm - disposable contact lenses, wetting solutions and other products related to healthcare. If price elasticity of demand is less than 1, then price rise will increase the total revenue of the firm and price fall would reduce the total revenue of the firm.