Eco561 W5 peer review

Introduction: Banana Inc. has been set to launch its new revolutionary smartphone into the existing market. The new device closely mirrors that of Apple’s iPhone. They can be simply differentiated by design and slight technological differences. Banana Inc. has had to consider the market structure they would be entering, price elasticity, how quantity affects marginal costs and marginal revenues, their non-pricing strategies, non-pricing strategies used to raise barriers to entry, and how changes in business operations could alter the mix of fixed and variable costs in line with their strategy.

Market Structure: This new phone, named Communicator, will join other competition in the oligopoly market. Some of the key traits belonging to this particular type of market structure are a few number of sellers, high barriers to entry, very good and differentiated substitutes, the nature of competition includes marketing, features, and price, and there is pricing power anywhere from little to significant (Finance Train, 2015).

Elasticity: The Communicator has been scheduled to be sold for a price of $499 per unit with a cost to the business of $250 per unit. One factor that will favor the somewhat high selling price is that there will not be very many substitutes in the market. The only competition the company will face will be that of similar brands and how they price their products. Based on trends with other major players in the same market the price will have to be lowered to sustain the desired number of sales. This will result in the product having a somewhat moderate elasticity between 4 and 5. Over time the price will be have to be lowered in order to sustain the desired amount of sales.

The changes in quantity supplied as a result of pricing decisions will be paramount in affecting marginal costs and marginal revenue. Profit maximization will be important for continued success for the company, so analysts will have to continually calculate and compare what the appropriate selling prices are against the quantity produced. Graphically, it would be observed as a downward shift on the demand curve to maintain equilibrium. “The company will usually adjust influential factors such as production costs, sale prices, and output levels as a way of reaching its profit goal” (InvestorWords, n.d.). Basically, this could affect other costs such as the workforce and even the quality of the product due to outsourcing.

Non-Pricing Strategies: Besides pricing decisions made by the company, other non-pricing strategies will have to be implemented in order to increase barriers to entry. One of the most important, and commonly used, methods in the market revolves around branding. The customer needs to feel better about their purchase emotionally to justify the sometimes hefty prices they pay for merchandise. Branding typically built by some type of special feature or appearance a particular product offers. For Apple, iTunes has played a major role in their branding because the consumer has the ability to store other audio and visual interests on their devices. For the Communicator the branding will come from similar options where all of their devices can connect and they can share amongst other users. Some ways the company plans to increase barriers to entry are by patenting their technology (sharing between devices and amongst other users), building the brand identity through marketing on social media, and building strong customer loyalty through adding additional options and upgrades as time elapses.

Fixed & Variable Costs: The company estimates the following costs based on those associated with the iPhone 5: manufacturing ($230 per phone), administrative ($2.65B), and research and development ($1.18B) (Sherman, 2013). These costs are not all inclusive, but they are the majority of costs to be considered. Companies have many options in the ways they conduct operations that alter the mix of fixed and variable costs. As mentioned before, one of the easiest ways to decrease production costs is to limit the workforce and/or their benefits. The company would save money, but they have to ensure they continue to maximize production in line with demand and the number of sales for profit maximization. Another way to decrease costs associated with manufacturing the Communicator is to implement alternative materials into the device such as aluminum versus steel, and so on. An additional cost to be considered is research and development. This will be important because new technology is vital to continued success in this industry. Another option is to outsource the manufacturing altogether where labor and material costs are much cheaper. China and Taiwan are prime examples of countries that manufacture many of America’s products in this manner.

The introduction of the Communicator will come by way of the oligopoly market structure. In this structure there are few sellers with distinguishable substitutes and high barriers to entry. The new device will be moderately elastic, as are other similar devices such as the iPhone, with an expected range between 4 and 5. The starting price will be $499, but over time the price will have to be dropped and the quantity produced will have to be adjusted to reobtain profit maximization. The major non-pricing strategy to be followed will be branding by through social media. Fixed and variable costs will continuously be measured and adjusted to reduce costs. This will be ascertained by managing the human workforce and controlling materials used in production. If necessary, the company will consider outsourcing.

References

Finance Train. (2015). Types of Market Structures. Retrieved from: http://financetrain.com/types-of-market-structures/.

InvestorWords. (n.d.). Profit Maximization. Retrieved from: http://www.investorwords.com/7690/profit_maximization.html.

McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics Principles, Problems, and Policies (18th ed.). New York, NY: McGraw Hill Irwin.

Sherman, J. (2013). Spendy but indispensable: Breaking down the full $650 cost of the iPhone 5. Retrieved from: http://www.digitaltrends.com/mobile/iphone-cost-what-apple-is-paying/#ixzz3pd9Gimuk.