We decided to enter Market C and this is currently the only market we have decided to operate in.
The high differentiation of brands in Market C is what initially attracted our firm. When consumers identify
with a brand, the price wars waged by opponents are rendered less effective. Undercutting an opponent from
-5% to -20% only yields a 5% increase in market share. This is a 1/3 gain (5% gain in market share, 15%
price change). Contrast this with the 2-to-1 gain we established earlier in Market A. Although the scrap value
isn’t as high as Market B’s, it is still higher than in both Market A and Market D. Our cost structure highly
favors Market C. The initial entry cost for the average firm is $70,000, but for CSI it is $53,613. This is over
1.6 standard deviations below the mean, and allows for a substantial head start in this market. As we saw in
Market B, the initial savings in the entry cost may have been drowned out by the high variable costs in the
long run. This probably would not occur in Market C. First, the savings in the initial entry cost is over $16,000,
versus $5,000 from before. More importantly, CSI is not at a variable cost disadvantage in Market C as it was
in Market B. Our cost of capacity per unit is $5 above the average, which accounts for a mere .63%
disadvantage. Also, our marginal cost is $1 below the average, which translates into a 5% advantage.
Considering the huge initial savings, the negligible cost of capacity disadvantage, and the slight marginal
cost benefit, CSI appears to be best suited for Market C.
: Market A is an attractive candidate due to the low mean entry cost, however, this also means it
may invite added competition. Although some brand loyalty does exist, most consumers will eventually vote
with their wallets if the price differential is substantial. Undercutting an opponent from
-5% to -10% yields a
market share gain of 11%. This demonstrates that the change in price results in nearly a 2-to-1 gain in
market share (11% gain, 5% change). Market A can sustain multiple firms, but only at low quantities; when
quantities increase, the returns diminish, which may then make Market A unprofitable depending on the
firm’s cost structure.
Despite its attractive entry cost, CSI’s cost structure is not favorable in this market (see
figure 1). Both our entry cost and mean cost of capacity are significantly above the market average. In