MARKETING STRATEGY OF DONNA

BUSS1040 Essay Assignment

This assignment requires you to explore a ‘real‐world’ application of a firm’s pricing strategy.

Your answer must be NO MORE than 500 words in length.

The question:

Donna, an economics student at one of Sydney’s finest universities, has a job selling Samsung phones. The job entails selling the handset (the phone), which comes along with a phone plan or contract that provides the customer access to the phone network for a period of time (for example 24 months) under certain conditions (cost per call etc).

Given her economics training, HQ of the Samsung puts Donna in charge of the company’s pricing strategy.

a. Assume initially that Donna knows the exact willingness to pay for the handset and the phone plan for each customer. What pricing strategy should Donna implement? Make sure you provide clear reasoning for your answer.you can consider Donna to be selling as a monopolist in parts (a) and (b).

b. Now assume that Donna does not know exactly every customer’s willingness to pay. Instead, Donna knows there are two groups of consumers, and that each consumer in a group has the same demand as every other consumer in that group. What sort of pricing strategy should Donna recommend? Be specific about the information the company needs to implement the pricing strategy, and how the company would go about obtaining this information.you can consider Donna to be selling as a monopolist in parts (a) and (b).

c. A major rival to the Samsung handset is the IPhone, which also offers consumers a similar handset + phone plan package. Assume that Donna knows the exact willingness to pay for the IPhone. How does the presence of the IPhone alter the pricing strategy Donna recommends in part a and b above?

School of Economics BUSS1040 Essay 1

Please note:

1. This essay is 500 words long (no more than 500 words), not including references, appendices and diagrams. Any essays longer than 500 words will only be read and graded up for the first 500 words. Use appendices and diagrams to support your essay.
2. Please submit an identical copy in the BUSS1040 drop box in the Merewether 
Building and online on Blackboard.
3. Apply the relevant theories from the unit of study when analysing the problem (please read the attached files).
4. You may need to undertake some research to complete this assignment. Make sure 
you reference your essay completely, consistently and accurately.
5. In this assignment, you will also be rewarded for the depth of your analysis using the 
tools that you will have been taught in the unit.
6. You must back up with evidence or logical reasoning all statements that you make. 
Your claims should be, where appropriate, supported by references to the existing work (detailed in the bibliography).

SOLUTION

a)     Since Donna is selling as monopolist in the market, the strategy has to either keep low prices or high prices. If the prices are kept low the demand will increase and if the price is high the demand will reduce. Thereby the production will have to be lowered.

Also another important consideration should be that the marginal revenue for the firm Donna is working for should be less than the price level at that point. However the marginal cost should be equal to the marginal revenue. This is to say that the cost of production of every additional unit should be equal to the revenue generated by that additional unit (Skeath, VelenchikL & Nichols, 1992).

It has to be appreciated that in case of monopoly the cost of production lies on economies of scale. Higher the production, lower the cost of production. Thus the total revenue will increase with additional quantity but at lower rate. In case of monopoly thus the profit maximization will be at the point where marginal cost is equal to marginal revenue and the price is greater than marginal revenue.

b) As mentioned there are two groups of consumers. First and foremost the information that should be made available is the number of consumers in each group. The strategy for the group with higher number will be different from the strategy for group with higher number of consumers. Another important factor that has to be considered is the buying power of the consumers in each group.

These are two important factors that have to be obtained from the market study because the pricing depends largely upon this only. This is because in case of the consumer group with high buying power and low strength the price of the phones will have to be high. This is because in case of monopoly, as discussed above, the price should be more than the marginal revenue which is equal to the marginal cost (Maddala & Miller ,1989). The marginal cost will be high as the economies to scale is not applying. This will lead to high price. In case of group with higher number of consumers the prices will be low as the demand will be high thus the marginal cost will be low and thus the low prices will prevail.

c)     The scenario given below is that of competitive market where in there is fierce competition from the competitors. As per this type of market the level of production and price is kept such that the price is equal to the marginal costs and the Average total cost is minimum. This is to say that the average total cost is rising.

However the total average cost should be less than the price in the short run (Eaton & Eaton, 1991). This is so in order that the firm at least meets its obligation of short term payments and thus is able to sustain in the market. Same should be the strategy of Donna in order to compete with competitors like Iphone in the market.

References:

Skeath S.E., VelenchikL Aa D., Nichols L M,. (1992). Consistent Comparisons between Monopoly and Perfect Competition. The Journal of Economic Education. 23 (3), pp. 255-261.

Maddala,G . S., and E. Miller. (1989).Microeconomics Theory and applications New York: McGraw-Hill.

Eaton, B. C., and D. F. Eaton. (1991). Microeconomics2. d ed. New York:W . H. Freeman

LD72

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