Greener Grass Company (GGC) competes with its main rival, Better Lawns and
Gardens (BLG), in the supply and installation of in-ground lawn watering systems
in the wealthy western suburbs of a major east-coast city. Last year, GGC’s
price for the typical lawn system was $1,995 compared with BLG’s price of
$2,100. GGC installed 9,130 systems, or about 55% of total sales and BLG
installed the rest. (No doubt many additional systems were installed by
do-it-yourself homeowners since the parts are readily available at hardware
stores.) GGC has substantial excess capacity—it could easily install 25,000
systems annually, as it has all the necessary equipment and can easily hire and
train installers. Accordingly, GGC is considering expansion into the eastern
suburbs, where the homeowners are less wealthy. In past years, both GGC and BLG
have installed several hundred systems in the eastern suburbs but generally
their sales efforts are met with the response that the systems are too
expensive. GGC has hired you to recommend a pricing strategy for both the
western and east¬ern suburb markets for this coming season. You have estimated
two distinct demand functions, as follows:
Qw =1, XXXXXXXXXX07164Pgw + 2.83Pbw + 2,100Ag - 1,500Ab + 0.2348Yw
for the western market and
Qe = 49, XXXXXXXXXX7692Pge + 6.984Pbe + 1,180Ag - 950Ab +
0.0825Ye
for the eastern market, where Q refers to the number of units sold; P refers
to price level; A refers to advertising budgets of the firms (in millions); Y
refers to average disposable income levels of the potential customers; the
subscripts w and e refer to the western and eastern markets, respectively; and
the subscripts g and b refer to GGC and BLG, respectively. GGC expects to spend
$1.5 million on advertising this coming year and expects BLG to spend $1.2
million on advertising. The average household disposable income is $55,000 in
the western suburbs and $25,000 in the eastern suburbs. GGC does not expect BLG
to change its price from last year, since it has already distributed its glossy
brochures (with the $2,100 price stated) in both suburbs, and its TV commercial
has already been produced. GGC’s cost structure has been estimated as TVC 5
755.363Q 1 0.005Q2 where Q represents single lawn watering systems.
a. Derive the demand curves
for GGC’s product in each market.
b. Plot graphically the
demand and MR curves for each market, and also show GGC’s combined marginal
revenue curve (?MR) and its MC curve. Show graphically the quantities that
should be produced and sold, and the prices that should be charged, in each
market.
c. Confirm your quantity and
price results algebraically.
d. Calculate the price
elasticities of demand in each market and discuss these in relation to the
prices to be charged in each market.
e. Add a short note to GGC
management outlining any reservations and qualifications you may have concerning
your price recommendations.