1} Read The Economist article "Food Fight\" [see Appendix}. a. Based on the article discuss the relationship between market structure and pricing in the market for packaged food. {E points} b. Discuss the role of the ma rket's 1certical relationships [upstream and downstream} for cost passon. [6 points] 2} Read The Economist article "Artificial prices\" (see Appendix}. a. Why is product pricing seen by marketeers as an art? How much science can be put into pricing? [5 points} b. Sapphire Organics is a producer of bio and vegan food. The company offers two healthy bio juices. The following table shows the current price points [per 1.5 liter bottle}. costs per bottle, the ownprice elasticities as well as their crossprice elasticity. {5 points} a... ass\"... -_ 4.5 ammo -\" Show whether the chosen retail prices are profitmaximizing. If the company wanted to change these retail prices, what would be the demand implications? [5 points} Food ght Packaged-food firms are running out of room to raise prices The war In Ukraine ls pushing up costs just as shoppers become fed up with Ination The Economist, Mar 26'", 222 The market for packaged foods is a competitive one, where price rises by one rm risk pushing shoppers into the arms of riyals. Companies in the industry deal with soaring costs by hedging against spikes in commodity markets using forward contracts, reforrnulating products so they contain less of the pricier foodstuffs or, failing that. surreptitiously making packages a bit smaller while keeping the ticket price the same. Amid pandemic-related supply-chain bottlenecks, labour shortages and crop failures, food rms have repeatedly done all that. Even so, they have had to raise prices. often less Judiciously than is ideal. The invasion of Ukraine, known as Eu rope*s breadbasket thanks to its rich soil, by Russia, the world's top exporter of wheat, is forcing their hand once again. Together the two countries aooount for 2995 of international wheat sales and nearly acres of sales of sunflower oil. Disruptions to those critical supplies are pushing up food companies\" costs just as energy costs are also skyhigh as a result of the war. It will be harder for European food companies to pass price rises to consumers than for American rms. Supermarkets in Europe are more concentrated than in America, and drive a harder bargain with suppliers. Walmart, America's biggest, controls 1296 of the domestic market. Its British and German opposite numbers, Tesco and Edeka, respectiyely, haye nearly m of theirs. Moreover, cost- conscious Europeans shop more at discou nters such as Aldi or Lidl. They are also less fussy than Americans about branded products and buy more of the retailers* own labels. - lulu-Ill\" mammalian-uni. it:- 11G Fllhm 'IIHI [in March 23rd General Mills, the American maker of Cheerios and Wheaties, among other sugary fare, reported healthy margins and quarterly sales that were higher than in the same period in 2D15, before the pandemic [though flat compared with last year}. The firm insisted that demand for packaged food should remain strong all year as many people continue to work from home at least some of the time. Robust appetite for its products will, the rm says, allow it to raise prices to offset the rising costs of oommodities. That may be optimistic. Shoppers' patience with inflation is wearing thin on both sides of the Atlantic. lnyestors expect margins to narrow. The share prices of big American, European and Chinese food rms alike took a knock after Russian tanks rolled onto Ukrainian elds on February 24th [see chart}. Surge pricing How companies use Al to set prices The pricing of products is turning from art into science The Economist, Mar 26th, 2022 Few american business tactics are as peculiar in a freewheeling capitalist society as the manufacturer's suggested retail price. P.H. Hanes, founder of the textile mill that would eventually become HanesBrands, came up with it in the 1920s. That allowed him to use adverts in publications across America to deter distributors from gouging buyers of his knitted under garments. Even today many American shopkeepers hew to manufacturers' recommended prices, as much as they would love to raise them to offset the inflationary pressures on their other costs. A growing number, though, resort to more sophisticated pricing techniques. A seminal study from 2010 by Mckinsey, a consultancy, estimated that raising prices by 1% without losing sales can boost operating profits by 8.7%, on average. Getting this right can be tricky. Set prices too high and you risk losing customers; set them too low and you leave money on the table. Retailers have historically used rules of thumb, such as adding a fixed margin on top of costs or matching what competitors charge. As energy, labour and other inputs go through the roof, they can no longer afford to treat pricing as an afterthought. To gain an edge, shopkeepers have been turning to price-optimisation systems. These predict how customers will respond to different pricing scenarios, and recommend those that maximise sales or profits. At their core are mathematical models that use oodles of transaction data to estimate price elasticities-how much demand increases as the price falls and vice versa-for thousands of products. Price-sensitive items can then be discounted and price-insensitive ones marked up. Merchants can fine-tune the algorithms to prevent undesirable outcomes, such as double-digit price surges or larger packages costing more by unit of weight than smaller ones. These systems are becoming cleverer thanks to advances in artificial intelligence (ai). Whereas older models used historical sales data to estimate price elasticities for individual items, the latest crop of ai-powered ones can spot patterns and relationships between multiple items. Makers of pricing software are incorporating new data sources into their models, from customers' tweets to online product reviews, says Doug Fuehne of Pricefx, one such firm. The cloud-based platform developed by Eversight, another provider, allows retailers to test how slight increases or decreases in the price of, say, Heinz ketchup at different stores affect sales not just of that specific condiment but across the category. It is used by big manufacturers such as Coca-cola and Johnson & Johnson, as well as some supermarkets (Raley's) and clothes-sellers (JCPenney). All this makes pricing systems "much more three-dimensional", observes Chad Yoes, a former executive at Walmart who oversaw pricing at the retail behemoth. Retail bosses are keen to promote this sophistication to investors, who value firms' pricing power at a time of high inflation. In February Starbucks, a chain of coffee shops, boasted about its use of analytics and ai to model pricing "on an ongoing basis". us Foods, a food distributor, has touted its pricing system's ability to use "over a dozen different inputs" to boost sales and profits. Price-optimisation may make prices more volatile. "Retailers are pricing faster today than they ever have before," says Matt Pavich of Revionics, another pricing-software firm. That is especially true in the fast-moving world of e-commerce. But even Walmart reviews the prices of many items in its stores 2-4 times a year, says Mr Yoes, up from once or twice a few years ago. What pricing systems do not do is lead inexorably to higher prices. Mr Pavich calls this misconception "one of the biggest myths" about products like his. Sysco, a big food distributor which rolled out new pricing software last year, is a case in point. The firm says the system allows it to lower prices on "key value items"-as price-sensitive bestsellers are known in the trade-and raise them on other products. It can thus increase profits by expanding sales while maintaining margins. That keeps investors content and shoppers sweet