Cross price elasticity
1) Consider a firm selling two products, A and B, that
substitute for each other. Suppose that an entrant introduces a product that is
identical to product A. What factors do you think will affect (a) whether a
price war is initiated, and (b) who wins the price war?
2) The following table reports the distribution of profits
(on a per-disc basis) for different steps in the vertical chain for music
compact discs:
Artist: $ .60
Record company: $1.80
Retailer: $ .60
Use the five forces to explain this pattern. (Note: There
are about half a dozen major record companies, including Warner, Sony, and
Polygram. They are responsible for signing up artists, handling technical
aspects of recording, securing distribution, and promoting the recordings.)
3) Consumers often identify brand names with quality. Do you
think branded products usually are of higher quality than generic products and
therefore justify their higher prices? If so, why don’t all generic product
makers invest to establish a brand identity, thereby enabling them to raise
price?
