(with permission from Professor James Reece, from
Forner Carpet Company produced high-grade carpeting materials for use in automobiles and recreational
vans. Forner’s products were sold to finishers, who cut and bound the material so that it would fit
perfectly in the passenger compartment or cargo area (e.g. automobile trunk) of a specific model vehicle.
These finishers also made carpet floor mats. Some of these finishers were captive operations of major
automobile assembly divisions, particularly those that assembled the “top of the line” cars that included
high-grade carpeting; other finishers concentrated on the replacement and van customizing markets.
Late in 1993, the marketing manager and the chief accountant of Forner met to decide on the list for
carpet number L-42. It was industry practice to announce prices just prior to the January – June and July –
December “seasons”. Over the years, companies in the industry had adhered to their announced prices
throughout the six-month season unless significant unexpected changes in costs occurred.
Forner was the largest company in its segment of the automobile carpet industry; its 1993 sales had been
over $40 million. Forner’s salespersons were on a salary basis, and each one sold the entire product line.
Most of Forner’s competitors were smaller than Forner; accordingly, they usually awaited Forner’s price
announcement before setting their own selling prices.
Carpet L-42 had an especially dense nap; as a result, making it required a special machine, and it was
produced in a department whose equipment could not be used to produce Forner’s other carpets. Effective
January 1, 1993 Forner had raised its price on this carpet from $3.95 to $4.75 per square yard. This had
been done in order to bring L-42’s margin up to that of the other carpets in the line. Although Forner was
financially sound, it expected a large funds need in the next few years for equipment replacement and
possible diversification. The 1993 price increase was one of several decisions made in order to provide
funds for these plans.
Forner’s competitors, however, had held their 1993 prices at $3.95 on carpets competitive with L-42. As
shown in Exhibit 1, which includes estimates of industry volume on these carpets, Forner’s price increase
had apparently resulted in a loss of market share.
Exhibit 1: Carpet L-42 Prices and Production 1991 - 1993
Production Volume (Sq. Yds)
Price per Sq. Yd.
* 199X-1 means the first 6 months of 199x; 199x-2 means second 6 months