Response_to_Competitor_Pricecut - University of Southern...

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University of Southern California Marshall School of Business BUAD 307 Lars Perner, Ph.D., Instructor Marketing Fundamentals Spring, 2012 RESPONDING TO A COMPETITOR PRICE CUT Ironically, when a competitor lowers its price, the most profitable response may, in fact, be to raise your price. After the competitor lowers its price, it is doubtful that you will be as profitable as you were before, but because many of the more price sensitive customers have already been lost, it may make more sense to settle for selling a smaller quantity at a larger gross margin. Here is an example to illustrate: SUPPLY, DEMAND, AND PROFIT BEFORE COMPETITOR CUT Price Quantity sold Revenue Unit cost Total gross margin $5.00 377 $1,883.45 $3.96 $1,962.28 $4.60 2,396 $11,022.44 $3.73 $9,548.11 $4.20 4,064 $17,069.15 $3.55 $11,121.66 $3.80 5,417 $20,583.64 $3.40 $8,271.76 $3.40 6,490 $22,065.43 $3.28 $2,671.96 $3.00 7,318 $21,954.79 $3.19 -$4,102.46 $2.60 7,936 $20,633.96 $3.12 -$10,692.66 $2.20 8,377 $18,428.66 $3.07
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This note was uploaded on 04/01/2012 for the course BUAD 307 taught by Professor Morristowns during the Spring '07 term at USC.

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Response_to_Competitor_Pricecut - University of Southern...

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