Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 17

You are a pricing manager at Argyle Inc.-a medium-sized firm that recently introduced a new product into the market. Argyle's only competitor is Baker Company, which is significantly smaller than Argyle. The management of Argyle has decided to pursue a short-term strategy of maximizing this quarter's revenues, and you are in charge of formulating a strategy that will permit the firm to do so. After talking with an employee who was recently hired from the Baker Company, you are confident that ( a ) Baker is constrained to charge $10 or $20 for its product, ( b ) Baker's goal is to maximize this quarter's profits, and ( c ) Baker's relevant unit costs are identical to yours. You have been authorized to price the product at two possible levels ($5 or $10) and know that your relevant costs are $2 per unit. The marketing department has provided the following information about the expected number of units sold (in millions) this quarter at various prices to help you formulate your decision:
Argyle and Baker currently set prices at the same time. However, Argyle can become the first-mover by spending $2 million on computer equipment that would permit it to set its price before Baker. Determine Argyle's optimal price and whether you should invest the $2 million.