The Eastman Paint Company has developed a new paint which is unique in that it allows the
Question:
The Eastman Paint Company has developed a new paint which is unique in that it allows the user to turn ordinary glass windows and doors into one-way glass. Moreover, it prevents the transmission of ultraviolet rays, a major factor in the fading of furniture fabrics, carpets, and draperies. The production manager, Arthur Eastman, has estimated the following average vari¬ able cost levels (per gallon) for the product for this year and for the next two years. Note that costs decline over time as the production process becomes increasingly streamlined.
The advertising manager, Ms. Lois Eastman, is excited about the prospects of the new paint. She believes that the market has long felt the need for such a product, and she has pre¬ pared a large campaign to launch the product. Several television advertisements are being pre¬ pared and a brochure is in print, all referring to the extensive test results and benefits of the new paint. The focus of the campaign is on the increased privacy afforded by the new paint, with emphasis given to the protection it provides by filtering out the ultraviolet part of the sun’s rays.
The price of the new product is to be determined. Market research suggests that the demand situation will be approximated by Q = 16 — O.blP in the first year (where Q repre¬ sents thousands of gallons and P is in dollars); Q = 20 - 0.77P in the second year; and Q = 17.83 — 0.87P in the third year. Indications are that market demand will increase in each of the first three years, but the entry of competitors with substitute paints in year 3 will cause East¬ man’s demand curve to shift to the left, as implied by the above specifications.
The marketing manager, Ms. Margaret Turriff, is faced with the problem of plotting price strategy over the next three years. While year 2 and year 3 prices can be determined in due time, the president of the company wants to know what type of pricing strategy Ms. Turriff intends to employ, since he is concerned that returns from this product be maximized, given the extensive research and development program that gave rise to the new product.
(a) What is the profit-maximizing price in each of the first three years, as estimated from the data given?
(b) Under what conditions would you advise the Eastman Paint Company to pursue a penetra¬ tion-pricing strategy?
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