Ina Food Industry

Professor Mitsuru Misawa prepared this case for class discussion. Dr. Misawa is a professor of finance and director of the Center for Japanese Global Investment and Finance at the University of Hawaii at Manoa. This case is not intended to show effective or ineffective handling of decision or business processes.

During his time as an executive officer at the Industrial Bank of Japan (now Mizuho Corporate Bank), Dr. Misawa acted as an international investment banker in charge of various industries in Japan. This case is Part 2 of a two-part case series about Ina Food Industry in Japan. It may be taught on a stand-alone basis or combined with the other case to create a joint-negotiation exercise. © 2013 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the internet)—without the permission of The University of Hong Kong.

Ref. 13/531C

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MITSURU MISAWA

INA FOOD INDUSTRY (2): MARKETING STRATEGIES IN A DEFLATIONARY

ENVIROMENT Ina Food Industry Co. Ltd. (“Ina Food”)1 was situated in the city of Ina, Nagano Prefecture, and surrounded by the soaring mountains of the Japanese Alps. Hiroshi Tsukakoshi, Ina Food’s 75-year-old chairman, had led the company through an incredible 55 years of continuous revenue and profit growth. Ina Food was a leading manufacturer of powdered agar,2 a traditional gelatin product derived from seaweed. Ina Food was producing healthy products that were used in cooking. The main product, Kanten Papa, was easy to use and was the very basis that mothers used in cooking at home and preparing family meals. As Japanese people worried about preserving their family life, easy-to-use ingredients became all the more significant in preparing family meals. By upgrading its refining process, Ina Food had found a new application for agar in the field of fine chemicals and medical products. Ina Food was pushing the frontier of biotechnology. In the summer of 2012, Tsukakoshi was looking through the windows of his office in Ina City, Japan. He was thinking about how he aimed for his company to be a corporation that was conscious of the global environment. He felt he had done a good job so far. The business had prospered and did not pose any urgent problems. But he also felt that he should not simply sit back and savor his success. He was facing his retirement and had concerns about the long- term growth of the company. He thought it might be the right time to introduce some new marketing strategies for the company. There was a reason for his concern: the Japanese deflation of the previous 20 years. He was interested in increasing sales volume and profit by raising prices when most other companies were lowering prices under deflation. To him,

1 “See Exhibit 1 for information about Ina Food.” 2 “See Exhibit 1 for information about Agar”

HK1011

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maintaining the current prices meant also price increases under deflation, since the general trend was towards price decreases.

Growth Strategy

Ina Food [see Exhibits 1 and 2] strove for perpetual existence. It sought stable, as opposed to quick and explosive, growth. The company’s policy had been a 2–3% increase in both sales and profit. Tsukakoshi believed that if a business grew too fast, backlash would undoubtedly occur. Tsukakoshi believed that clients generally became aggravated when the price of an identical item swung violently up and down. This company had so far used a meticulously controlled pricing policy for each product category. Company personnel continually reviewed and changed the individual prices of over 100 products to maximize sales and profit on the whole. Shareholders always asked for a short-term return. Management tended to let the company grow fast in all possible ways, such as sharp price increases, bigger production capacity, or more output by overwork. Or the huge demand might come all of a sudden. For example, the year 2005 was a special year for the company. The business boom for Ina Food was caused by a notion promoted on national TV that agar was good for health. In response to this broadcast, the company began receiving a flood of orders for agar. At first, management felt that it should not fulfill the orders. This rather counterintuitive decision came from the company’s motto, “Those who plan for the distant future would be rich and those who plan for the near future would be poor,” taken from Sontoku Ninomiya (1787–1856),3 who was highly respected in Japan for his work on ethics and benevolence. After a few months of operating at full capacity in 2005, the employees started showing signs of strain. Tsukakoshi believed they could not continue production at this breakneck pace and he decided instead to decrease production. Consequently, he began to think that the company did not exist for the management or even for itself; rather, it existed for the happiness of the employees. If all the employees were happy and had a high morale, the communities they lived in would improve, thus making a contribution to society.4

A company exists for its employees. Happiness and steady growth makes it possible for the company to grow forever.

- Hiroshi Tsukakoshi, chairman of Ina Food5

Deflation

Since December 29, 1989, when the Japanese stock market reached a historical all-time high, ¥38,915, the Japanese economy had lost two decades to economic stagnation [see Exhibit 3].

3 Sontoku Ninomiya was a farm technologist and the leading agricultural philosopher of the late Edo period (1600–

1868). His practical and moral teachings, which urged cultivators to raise output and pay their taxes, helped strengthen the economic basis of Tokugawa rule. For this he was later praised as a paragon of virtue in the national ethics textbooks of the 1930s. Ninomiya taught farmers to improve themselves through hotoku (“repaying virtue”), the idea that benefits received from heaven, man, and earth should be repaid, and that doing so would create a “true society” of peacefulness and prosperity. To the familiar Confucian virtues of sincerity, diligence, and thrift, Ninomiya added cooperation with others to his code of ethics. See Kodansha (1983) Kodansha Encyclopedia of Japan, Tokyo, vol. 6, p. 7.

4 Tsukakoshi, H. (2005) “Iikaisha wo Tsukurimashou” (Let us build a good company), Bunya Publishing Company, 7th Edition, pp. 11-213.

5 Ibid.

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During this period, Japan had also suffered from chronic deflation. Deflation6 was caused by a shift in the supply-and-demand curve for goods and services, particularly a fall in the aggregate level of demand, leading consumers to have an incentive to delay purchases and consumption until prices fell further, which in turn reduced overall economic activity. Consumers were clever; they reasoned that “tomorrow’s price would be lower than today’s.” Because this idled productive capacity, investment also fell, leading to further reductions in aggregate demand. This phenomenon was known as the deflationary spiral. To counter these alarming trends, Japan enacted a zero-interest-rate policy, but so far it had not fostered sufficient expansion to induce recovery. Neither had the most recent expansion of the monetary base. Changing expectations of deflation to expectations of inflation in consumers was not easy. This was the path that the Japanese economy had walked in the previous 20 years, and Tsukakoshi was concerned that even his company could not continue to grow under deflation. During a deflationary period, consumers were reticent to spend. Companies selling a good or service had to make adjustments in order to continue earning profits, attempt to break even, or sometimes even lose as little money as possible in the hopes of staying afloat until the deflationary period ended. Of course, with any decision as drastic as this, it was important to carefully judge how it would affect every facet of the company—bottom line, brand, customers’ perceptions, and anticipated position once the deflationary period ended, to name a few. A common first move by companies navigating this difficult situation was to explore changing their pricing strategy. Price decreases, including predatory-pricing strategies to combat decreased market share and insufficient demand, were popular choices among these companies. On this occasion, Tsukakoshi explored the relationship between consumers and price. It had been well established that consumers used price as a guide in consumption decisions. Price information could be accumulated passively through prior knowledge and experience, or actively sought through comparative shopping.7 Consumers viewed price as an indicator of quality. 8 The connection was further explored, finding a positive correlation between reference price and consumers’ opinions of quality. 9 Even though a high-priced product required financial sacrifice on the part of the consumer, so too did the higher-priced product garner more esteem. Therefore, perceived value was a trade-off between perceived sacrifice and perceived prestige. Given this, it implied to Tsukakoshi that companies could use pricing as a tool to influence consumer behavior.

6 The opposite of inflation, deflation meant a general decline in prices, often caused by a reduction in the supply of

money or credit. Declining prices, if they persisted, generally created a vicious spiral of negatives, such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals. It could be caused also by a decrease in government, personal, or investment spending. It had the side effect of increased unemployment since there was a lower level of demand in the economy, which could lead to an economic depression. To counter deflation, central banks attempted to use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Rising prices provided an essential lubricant for any sustained recovery because businesses increased profits and took some of the depressive pressures off wages and debtors of every kind.

7 Mazumdar, T. and Papatla, P. (2000) “An Investigation of Reference Price Segments,” Journal of Marketing Research, 37(2), pp. 246-258.

8 Teas, K. R. and Agarwal, S. (2000) “The Effects of Extrinsic Product Cues on Consumers’ Perceptions of Quality, Sacrifice, and Value,” Journal of the Academy of Marketing Science, 28(2), pp. 278-290; Yoo, B., Donthu, N. and Lee, S. (2000) “An Examination of Selected Marketing Mix Elements and Brand Equity,” Journal of the Academy of Marketing Science, 28(2), pp. 195-211.

9 Chapman, J. and Wahlers, R. (1999) “A Revision and Empirical Test of the Extended Price-Perceived Quality Model,” Journal of Marketing Theory and Practice, 7(3), pp. 53-64.

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Price Decrease or Increase

Tsukakoshi further considered price decreases. For a company caught in an economy in recession, simply decreasing supply might not have been enough to offset the decrease in consumer demand. If that was the case, prices might have needed to be adjusted downward, which often caused cutthroat price competition. The rationale was that weaker companies, unable to stay afloat during the difficult times, would withdraw from the market. In general, resource-poor or less established companies were forced to join the price-cutting competition. Resource-abundant or more established companies, however, were more likely to have a choice. Common rationale dictated that resource-rich companies would have the infrastructure and holdings to survive a drought, but it was less clear whether or not simply surviving the drought was the best choice. The fact was highlighted that overuse of price as a promotional tool might have damaged the prestige of a brand.10 The issue was explored further that consumers perceived such price cuts as an admission of product quality reduction, reducing previously high brand associations and awareness. 11 Recent studies agreed with traditional brand management beliefs, which stated that preferences for a certain brand were easily damaged, or forgotten, after price promotion. 12 In a study on sustainable pricing strategies, it was urged that companies should consider both internal and external influences.13 Though it might have seemed that larger and more established companies, with more abundant resources and experience, would be better equipped to handle recessionary periods, Tsukakoshi knew this was not always the case. In fact, it was found that small companies sometimes had better survival rates than large companies.14 It was much easier for small companies to shift to a new or niche market, as well as imitate their larger competitors’ actions and perform new pricing and promotional actions more quickly; they were strategically nimble.15

Price Elasticity of Demand

The price elasticity of demand [see Exhibit 4] for Ina Food’s goods was generally low. Raw agar was made of seaweed and there was no competition as a healthy product. Agar was considered to be life saving, as it contained lots of vegetable fiber and was effective in preventing obesity, high blood pressure, hyperlipidemia, and diabetes. The following were characteristics of Ina Food’s goods with low price elasticity: 1. Goods with differentiations that had no competition in the market. 2. Goods that were selling for reasons other than price, which consumers thought were

cheap compared to alternative merchandise. 3. Goods without clear alternatives, merchandise for which the manufacturers always found

order backlogs, or those whose demand always exceeded supply. 10 Ibid. 11 Yoo, B., Donthu, N. and Lee, S. (2000) “An Examination of Selected Marketing Mix Elements and Brand

Equity,” Journal of the Academy of Marketing Science, 28(2), pp. 195-211. 12 Guadagni, P. M. and Little, J. D. C. (1983) “A Logit Model of Brand Choice Calibrated on Scanner Data,”

Marketing Science, 2(3), pp. 203-238; Scott, C. A. and Yalch, R. F. (1980) “Consumer Response to Initial Product Trial: A Bayesian Analysis,” Journal of Consumer Research, 7(1), pp. 32-41.

13 Chou, T. and Chen, F. (2004) “Retail Pricing Strategies in Recession Economies: The Case of Taiwan,” Journal of International Marketing, 12(1), pp. 82-102.

14 Duncan, J. W. and Handler, D. P. (1994) “The Misunderstood Role of Small Business,” Business Economics, 29(3), pp. 7-12.

15 Grinyer, P. H. and Yasai-Ardekani, M. (1981) “Strategy, Structure, Size and Bureaucracy,” Academy of Management Journal, 24(3), pp. 471-486; Stasch, S. F., Lonsdale, R. T., Ward, J. L. and Harris, D. A. (1999) “Characteristics of Share-Gaining Marketing Strategies for Smaller-Share Firms: Literature Review and Synthesis,” Journal of Marketing Theory and Practice, 7(2), pp. 54-67.

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Factors Supporting Price Increase under Deflation

Tsukakoshi believed that, in essence, as long as a company was confident in its products’ competitiveness, there were always methods to raise prices and increase profits smoothly. The key was raising the prices of merchandise and services in a way that the customers could accept the price changes. Not all companies could do it, though. These consumers might not have noticed the price increase in short periods of time, but over a year or more they would become obvious as the increased prices started to constrain consumer budgets. Then the consumers would stop buying that product. Why could Ina Food do it? The consumers would not stop buying its product even after they noticed the price increases. Tsukakoshi thought Ina Food could do it because of the seven good business practices below.

1. Be a good company. Tsukakoshi believed that increasing hedonic value16 could increase consumer loyalty to the brand and thus allow for greater price increases.17 Tsukakoshi had made it a priority that the company maintain a meaningful presence, constantly striving to be a corporate entity lauded and appreciated by its stakeholders. He considered that in its quest to seek better profits and efficiency, the company must have been careful not to inconvenience its customers and suppliers, not to discard its regard for the environment, and not to force sacrifices upon its employees.

2. Be a company conscious of progress and not of trends. Tsukakoshi believed that there was an axis of progress and an axis of trend in human society. The axis of progress was a straight line that led to an ideal society. The axis of trend was a movement of society that swung constantly to the left and right, perpendicular to the axis of progress. He felt that the axis of trend should be accounted for, but warned against misunderstanding it as the path to follow. According to Tsukakoshi, American-style management, which paid disproportionate attention to shareholders’ profits, was merely a trend. If one wanted stability and long-term existence of a company, one should not have been influenced by trends. To move steadily along the axis of progress with a thorough understanding of the optimum growth rate, while keeping an eye on trends, was the ideal mix for the company.

3. Stabilize materials costs. In order to store more agar, the company built four additional bays of storage buildings, using the profits earned from a price hike. At the same time, the production facilities and the factory were enlarged to increase production capacity. Furthermore, Tsukakoshi and other members of top management visited various countries to secure suppliers of raw materials needed in the production of agar in order to stabilize flow inputs. They visited approximately 20 countries, including Chile, the Portuguese Azores Islands in the Atlantic Ocean, Morocco, China, South Korea, and Vietnam, in search of partner companies. The company signed partnership agreements with suppliers from three countries: Chile, Morocco, and South Korea. As a result of its new and stable supplies and its increased storage capacity, the company was able to maintain constant price increases. Recently the company had published an opinion

16 Hedonic value was defined as the degree of happiness or sadness felt by the decision maker at the moment of an

outcome’s announcement. For details, see Bagai, J. P. (1999) “Hedonic Value and Choice,” PhD Dissertation, University of Pennsylvania, Paper AAI9926093, http://repository.upenn.edu/dissertations/AAI9926093 (accessed [accessed July 23, 2013]).

17 Chaudhuri, A. (1999) “Does Brand Loyalty Mediate Brand Equity Outcomes?” Journal of Marketing Theory and Practice, 7(2), pp. 136-146; Chaudhuri, A. and Holbrook, M. B. (2001) “The Chain of Effects from Brand Trust and Brand Affect to Brand Performance: The Role of Brand Loyalty,” Journal of Marketing, 65(2), pp. 81- 93.

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advertisement in an industry paper declaring, “Agar is no longer a market-driven flamboyant merchandise.”

4. Maintain strong research and development. Tsukakoshi believed that the survival of an enterprise rested on its research and development (“R&D”) capabilities and that R&D should be a mainstay of any company. Based on this conviction, it had been a company rule to always engage 10% of its workforce in the research and development of materials and production technologies. Agar, which was mostly dietary fiber of very low calorific value, presented limitless possibilities for development. The company was pushing the frontier of biotechnology. This attitude supported its task of exploring new possibilities for agar. By upgrading its refining process, it had found a new application for agar in the field of fine chemicals. Research at the company was not only for making profits, but also allowed excited young researchers to pursue their dreams.

5. Present the proposed uses. Tsukakoshi believed that presentation determined demand. New types of agar developed from basic R&D augmented the benefits for Ina Food’s customers. The company was fully equipped with the necessary facilities to conduct conclusive experiments. The research department regularly took newly developed materials to exhibitions of other industries, such as high-tech materials, and showed them around, asking for possible uses in new products or processes.

6. Discover new uses. In one discovery, the research department noted an agar that could not be solidified. Such a product, while obviously unsuitable for normal usage, could have some use if Ina Food could develop a technology to produce it in a stable manner. A use was found: a soft agar for elderly patients who had difficulty swallowing. The company then produced soft foods made of agar by adding water and cooked food chopped into small pieces, which made it easier for elderly people to swallow. The technology to produce unsolidified agar was patented and was also used to produce agar juices, lipsticks, and cosmetic foundations.

7. Maintain close communication with customers. To serve customers, Ina Food set up a mail order department, which had 500,000 regular customers. This allowed for an ideal relationship with clients. As soon as it received a complaint or a thank you letter, it sent back a handwritten letter to the client. Although it sold the products through the internet as well, relationships with clients were such that when an employee handling client communications got married, he or she received numerous gifts from clients congratulating him or her on the marriage.

Contrarian Theory

ContrarianTheory suggested that for a company caught in an economy in recession, simply decreasing supply might not be enough to offset the decrease in consumer demand and prices might need to be adjusted downward. Tsukakoshi knew that raising the price under deflation was contrary to this theory. When the economy faced serious difficulties, the company had obtained successful results in marketing, producing, financing, and allocating resources. Tsukakoshi thought it might have to act the role of “contrarian” as the basis of success. A “contrarian” acted in opposition to others, or rejected popular opinion. The company’s position as a contrarian was supported by the following reasons:

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1. Traditionally, it had been believed that a high demand for a product was a clue to raise prices and that there was a negative correlation between price level and willingness to buy. But if the consumer perceived that a product was harmonious with certain of his or her key needs and values, he or she would continue to purchase it despite price increases.

2. Price itself could be used as a tool to control consumer behavior. A wanted hedonic value

ascribed to merchandise could increase loyalty to the brand, enabling companies to be more fluid with price changes.18

3. Price, in some instances, might actually have played a subordinate role to product

worthiness in the consumer’s decision-making process. This could be put in terms of price elasticity of demand. In this case the demand for a good was inelastic and a consequence of this was that price change had a relatively small effect on the quantity of good demanded.

Decision Time for the Future

Tsukakoshi was thinking that a new pricing strategy had to be explored to maintain successful performance despite deflation. Under long-lasting deflation, Tsukakoshi was thinking that it was high time for him to make a decision on the new pricing strategy. He had to make decisions in a dynamic environment of deflation and evaluate various options: 1. Decrease the price as other companies had 2. Stay as is, which was a de facto price increase under deflation 3. Increase the price as a contrarian. Raising prices in a difficult economic climate was a risky decision. Many studies had pointed out that the overuse of price as a promotional tool could damage the prestige of a brand.19 It was risky for companies to rush into price competition without considering the possible side effects. The company would be successful in increasing sales and profits even while the economy at large faced deflation. If the gross margin of a product was 30%, it could be increased by as much as 17% through simply raising the price 5% if the cost was not changed. In general the gross margin would drop as the number of units sold dropped when the price was raised, but Ina Food had merchandise whose sales quantities were less sensitive to price increase than average merchandise. Tsukakoshi asked the marketing department to create a list of the pricing strategies for the future. 1. Introducing a new and similar product in a higher price range. By introducing it well,

through good advertisement, the company enticed consumers from existing products to the new one. Once the new product was available for consumption, it terminated existing products.

2. Blaming a price increase on the increase of a constituent raw material, the change of a

materials supply source, the rise in cost of imported materials due to yen depreciation, etc.

18 Chaudhuri, A. and Holbrook, M. B. (2001) “The Chain of Effects from Brand Trust and Brand Affect to Brand

Performance: The Role of Brand Loyalty,” Journal of Marketing, 65(2), pp. 81-93. 19 Chapman, J. and Wahlers, R. (1999) “A Revision and Empirical Test of the Extended Price-Perceived Quality

Model,” Journal of Marketing Theory and Practice, 7(3), pp. 53-64.

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The company could have begged the pardon of consumers, appealing to their understanding through public relations efforts. It was essential that it was careful not to cause the customers to feel like the company was using the situation to its advantage.

3. Implementing the price range by changing the product line up. There were three grades of

merchandise for a particular kind of product—lower, middle, and upper class—and they were priced at ¥110, ¥140, and ¥170, respectively. Ina Food had established that customers tended to choose the middle-class product, that is, the product sold at ¥140. This type of consumer psychology was best exemplified in a sushi bar where clients tended to choose the better if there were three classes of sushi: best, better, and good. The company then introduced a new product line, which had the upper-class price of ¥200. Customers were made to feel, through advertising, that the ¥170 and ¥200 products shared some basic quality, causing them to flock to the ¥170 product. This resulted in a price increase by shifting the demand for the ¥140 product to the ¥170 product. The company could terminate the ¥110 product with proper timing, thus smoothly completing the price increase campaign with little resistance [see Exhibit 5].

4. Shifting the price range in one blow by changing the product name. In one discovery, the

research department noted that it sometimes created agar that could not be solidified. A new use was found: a soft agar for elderly patients who had difficulty swallowing. Ina Food changed the name of the product and raised the price.

5. Transferring the cost of services that used to be free, such as wrapping and delivery, to the

consumer, making them available only for a fee.

Top management had to make a decision about whether the company should adopt these techniques if it decided to raise the prices. The decision had to be made based on Tsukakoshi’s management philosophy that Ina Food should be a good company.

Let us build a good company. I hope to make it a company not just with good management indices, but a company that people would call a good company.

- Hiroshi Tsukakoshi, chairman of Ina Food20

20 Tsukakoshi, H. (2005) “Iikaisha wo Tsukurimashou” (Let us build a good company), Bunya Publishing

Company, 7th Edition, pp. 11-213.

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EXHIBIT 1: COMPANY PROFILE Company name Ina Food Industry Co., Ltd. Chairman and CEO Hiroshi Tsukakoshi President and COO Osamu Inoue Date established June 18, 1958 Capital ¥96.8 million Annual sales ¥17,449 million (2012) Operating income ¥2,291 million (2012) Head office address 5074 Nishiharuchika, Ina-City, Nagano, Japan

Plants Sawando Plant, Kitaoka Plant, Fujisawa Plant, Inosawa Plant Branches Tokyo, Nagoya, Osaka Business offices Sapporo, Sendai, Nagano, Fukuoka, Okayama Number of employees 423 (2012) Ina Food Industry Co. Ltd. was established in 1958 to produce agar. This natural gelatin was originally developed as an important ingredient and used in traditional Japanese confectionery. Its manufacture was the product of a cottage industry by farmers, who used the natural cold during the coldest three months of the year for its production. As a consequence of (a) production being confined to only the three winter months of the year when the farmers were free, (b) the quantity and quality not being stable or reliable, (c) it appearing in both bars and a fibrous state, and (d) it being the victim of a seasonally fluctuating market, use of the product was avoided by large industry. Ina Food therefore concentrated on producing powdered agar, developed sources from which the raw material could be imported and stored throughout the year, and through the consolidation of production into a highly efficient process, achieved a stable market that eliminated fluctuating prices to develop a stronger demand. The history of the company was actually the history of the development of powdered agar in Japan. Recently, with the discovery of the cancer-resistant properties of oligosaccharides in agar, agar’s effectiveness as a deterrent of constipation, its use in meals for the aged, etc., distinctively effective uses of agar had been on the increase. Source: Annual Report Ina Food Industry, 2013

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EXHIBIT 2: SALES, OPERATING INCOME, AND NUMBER OF EMPLOYEES FOR INA FOOD FOR THE PAST 10 YEARS

Source: Annual Report Ina Food Industry, 2013

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EXHIBIT 3: JAPAN CONSUMER PRICE INDEX (JAN. 1985-APRIL 2013) The Consumer Price Index (CPI) in Japan decreased to 99.50 index points in January 2013 from 99.60 index points in December 2012. The CPI in Japan was reported by the Statistics Bureau of Japan. Historically, from 1985 until 2013, the CPI averaged 99.13 index points, reaching an all-time high of 104.90 index points in November 1998 and a record low of 89.10 index points in February 1985. In Japan, the CPI measured changes in the prices paid by consumers for a basket of goods and services. This page includes a chart with historical data for the CPI.

Source: Tradingeconomics.com | Statistics Bureau, Japan

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Price Elasticity

of Demand (PED) = = =

% change in Quantity % change in price

% � Q % � P

EXHIBIT 4: PRICE ELASTICITY OF DEMAND The price elasticity of demand (commonly known as just price elasticity) measures the rate of response of quantity demanded due to a price change. The formula for the price elasticity of demand is:

(1) Given the following data, let us calculate the price elasticity of demand (PED).

Price (OLD) = 9 Price (NEW) = 10 Quantity of Demand (OLD) = 150 Quantity of Demand (NEW) = 110 Then, Percentage Change in Quantity Demanded = -0.2667 [110 - 150] / 150 = (-40/150) = -0.2667 Percentage Change in Price = 0.1111 [10 - 9] / 9 = (1/9) = 0.1111 Then, PED = (% Change in Quantity Demanded) / (% Change in Price) We can now fill in the two percentages in this equation using the figures we calculated earlier. PED = (-0.2667) / (0.1111) = -2.4005 When we analyze price elasticity we are concerned with their absolute value, so we ignore the negative value. PED is always positive. We conclude that the price elasticity of demand when the price increases from $9 to $10 is 2.4005. (2) Interpretation of Price Elasticity of Demand

In the case of price elasticity of demand, it is used to see how sensitive the demand for a good is to a price change. The higher the price elasticity, the more sensitive consumers are to price changes. A very high price elasticity suggests that when the price of a good goes up, consumers will buy a great deal less of it, and when the price of that good goes down, consumers will buy a great deal more. A very low price elasticity implies just the opposite, that changes in price have little influence on demand.

If PED > 1 then Demand is Price Elastic (demand is sensitive to price changes)

If PED = 1 then Demand is Unit Elastic

If PED < 1 then Demand is Price Inelastic (demand is not sensitive to price changes)

In the case of the good above, we calculated the price elasticity of demand to be 2.4005, so our good is price elastic and thus demand is very sensitive to price changes.

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This document is authorized for use only by Sebastian Ferlin in FALL 2018 BUSINESS POLICY AND STRATEGY CAPSTONE taught by CAROL CONNELL, CUNY - Brooklyn College from Aug 2018 to Dec 2018.

13/531C Ina Food Industry (2): Marketing Strategies in a Deflationary Environment

13

Exhibit 5. Price increase by adding the higher price

Strike out

New 3 prices

increases

Old 3 prices

¥110 ¥140 ¥200¥170

EXHIBIT 5: PRICE INCREASE BY ADDING THE HIGHER PRICE

For the exclusive use of S. Ferlin, 2018.

This document is authorized for use only by Sebastian Ferlin in FALL 2018 BUSINESS POLICY AND STRATEGY CAPSTONE taught by CAROL CONNELL, CUNY - Brooklyn College from Aug 2018 to Dec 2018.