August 18, 2014
Mr. J. Carl Bowman
An economic analysis of a business proposal allows the company to take a closer look at any given product to determine whether or not improvement(s) is/are needed. An economic analysis will also help a company to determine if resources are being allocated in the most effective manner. This week’s assignment required that an economic analysis section of a business proposal be completed. Included is information about the market structure and the elasticity of demand for a good, based on textbook principles. Hypothetical data, based on similar real world products will be used to estimate fixed and variable cost. The good to be used in the economics analysis section of a business proposal is Pantene. Founded in 1945, by the Swiss drug company, Hoffman-LaRoche, Pantene shampoo known for its core ingredient, Panthenol. Pantene entered the European market before making its way to the United States in the 1060s. Of the four market structures, Pantene is considered to be part of the monopolistic competition. According to the textbook, a monopolistic competition is characterized by (1) a relatively large number of sellers, (2) differentiated products (often promoted by heavy advertising), and (3) easy entry to, and exit from, the industry (McConnell, et al, 2009). As far as elasticity of the product, Pantene is considered to be highly elastic in the shampoo market. There is a high demand for Pantene. Pantene prides itself on being one of the best shampoos on the market. Despite cheap imitators and the tremendous growth of the shampoo industry Pantene continues to be a leader in the shampoo industry. This is indicative of it being highly elastic. How will pricing relate to elasticity of Pantene? Pantene is typically set at a retail price of $7.99, which would allow for a 20% gross margin. However, other pricing factors such as manufacturing costs, quality of the product, and marketplace, must be considered. Pantene is a subsidiary of Proctor and Gamble (P&G). Proctor and Gamble has “a goal to develop and market $50 billion worth sustainable innovation products, which P&G is on its way with $13.1 billion sold since July 2007.” (www.Pantene.com). How will changes in the quantity supplied as a result of Pantene’s pricing decisions affect marginal cost and marginal revenue? The shampoo industry is forever changing. Pantene remains constant with its product retail price of $7.99. Pantene realizes that lowering its retail price of $7.99 in not one of the options it wishes to choose to increase revenue. The shampoo market is very competitive. Therefore, to increase revenue, Pantene will seek ways to cut in the production and manufacturing areas of its products. Innovations in technology must be utilized, and antiquated systems must be replaced. Profit maximizing quantity and price can be determined by setting marginal revenue equal to zero. Marginal revenue equals zero when the marginal revenue curve has reached its maximum value. This will ultimately lead to changes in revenue and cost. Besides Pantene’s pricing decisions, what are their suggested non-pricing strategies? What non-pricing strategies will Pantene use to increase barriers to entry? Pantene will use better and more effective advertising as means of employing non-pricing strategies. In the past, Pantene has used celebrities like Oprah Winfrey to endorse their products. In addition to, the use of celebrities to endorse the brand, Pantene will also offer coupons, free gifts, magazine advertisement, and in-store displays. To create barriers to entry, Pantene will increase its advertising, and by doing so, it would make it virtually impossible for newcomers to match nor compete with Pantene. The use of customer loyalty cards would also increase barriers to entry for new companies. Finally, barriers to entry can be created by...
References: Mc Connell, C.R., Brue, S.L., & Flynn, S.M. (2009). Economics. Principles, Problems, and Policies (18th ed.). Boston, MA: Mc Graw-Hill Irwin.
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