Economyccccc

If you don’t have information you think you need, then assume it—but make your assumptions explicit. Remember, I am solely interested in your economic thought process (i.e., the how’s and why’s of your answer).

Business Plan: Mobile MRI in Mexico (the company name is M3)

Background: With approximately 20 million citizens, the demand for MRI’s (magnetic resonance imaging, useful for imaging damaged or diseased tissue) in Mexico City is very large. But with only a few MRI machines in the entire city, patients have to wait almost a year—if they are lucky—to gain access to an MRI. The plan is to buy a mobile MRI unit in the US (readily available for a total cost of approximately $1.2 million), drive down to Mexico City, and sell around-the-clock MRI services by the week to the highest paying hospitals and clinics. The entrepreneurs seek capital to purchase one mobile MRI unit. Labor costs are predicted to be low (plenty of cheap but skilled Mexican medical workers); the only other major costs will be maintenance and fuel.

1. Define M3’s market by identifying both their customers and their competitors. These are free points, as I only need to know what you think so I can grade the next questions…(5 points)

2. Compared to their competitors, does M3 have a benefit position, a cost position, both, or neither? What are the sources of their advantage? Be explicit and complete in identifying the sources of their advantage. (20 points)

3. Given your answer to (2), should M3 exploit their competitive advantage by using a market-share or a profit-margin strategy? Explain your logic. (10 points)

4. Thinking only of M3’s relationship with their competitors, recommend some pricing strategies M3 could use to create cooperative pricing. What factors will make M3’s attempt to create cooperative pricing easier, and what factors will make the attempt more difficult? Do you think M3 will succeed in creating cooperative pricing? Your answer here is independent of your answer in (3). (15 points)

5. Explain how M3’s investment in a road-ready MRI’s will affect the behavior of actual or potential rivals and thus the sustainability of their comparative advantage. Be sure to state whether you are assuming Cournot or Bertrand competition and explain why your assumption is reasonable. Discuss credibility and commitments. (You may want to read the next question before answering.) (15 points)

6. Explain how your pricing strategy recommendation in parts (3) & (4) will affect the sustainability of M3’s comparative advantage. Would you change your recommended pricing strategies from (3) & (4)? (15 points)

7. I suggested M3 needs to enter bigger: five mobile MRI’s instead of just one. M3 said no, if they entered bigger then the existing MRI providers would expand and compete (note their response assumes Bertrand). So I asked for some quick profit forecasts, and this is what they gave me (first number is M3, all numbers are profits):

	The Competition
M3		No Response to M3	Expand&Compete
	One MRI	10, 20	7, 15
	Five MRI’s	15, 10	2, 5

What should M3 do? Fully explain your logic—I better see the word “Nash” in your answer. (20 pts)