Question

•When P &G planned to enter the Japanese market for Gypsy Moth Tape, it knew its product cost and understood the market demand curve but found it hard to determine the right price to charge because two firms – Kao Soap Ltd. And Unilever Ltd. – were also planning to enter the market. All three firms would be choosing their prices at about the same time and P&G had to take this into account when setting its own price.

•Because all three firms were using the same technology for producing Gypsy Moth Tape, they had the same production costs. Each firm faced a fixed cost of $480,000 per month and a variable cost of $ 1 per unit. From market research, P&G ascertained that its demand curve for monthly sales was

?=3375?−3.5(??)0.25(??)0.25Q=3375P^(-3.5) 〖(P_U)〗^0.25 〖(P_K)〗^0.25

•Where Q is monthly sales in 1000s of units, and P,??,??P_U,P_K are P&G’s, Unilever’s and Kao’s prices, respectively. Now put yourself in P&G’s position . Assuming that Unilever and Kao face the same demand conditions, with what price should you enter the market and how much profit should you expect to earn?

	Charge $1.4	Charge $1.5
Charge $1.4	$12,$12	$29,$11
Charge $1.5	$3,$21	$20,$20

Answer 1

Please refer to the solution below.