Fighting for Market Share

Balboa Technology Group

Youare the division manager inchargeofdeterminingwhetherBalboaTechnologyGroupshould enter the dishwasher control chip market. Balboa is considering whether it should design, produce, andmarketa dishwashercontrolchiptodishwashermanufacturers.Therearetwotypes ofchips they are consideringa standard chip, similar to those on the market today, and an advanced chip, with more processing power and sensor inputs. The standard chip will cost $550 to develop, while theadvancedchipwillcost$700todevelop;Balboaonlyhastheresourcestodeveloponechip. Regardless of which chip Balboa chooses to develop, the marginal cost of production for a unit of chips will be $5.

The Dishwasher Control Chip Market

Themarketconsistsoftwotypesofconsumers:producersofeconomydishwashers(economy producers)andproducersofluxurydishwashers(luxuryproducers).Thereare80 economy producers,eachofwhomdemandsoneunitofcontrolchips, and valuesthatunitat$20;theyare indifferent between standard and advanced chips. There are also 20 luxury producers, each of whomalso demands one unit of chips; a luxury producer values a unit of standard chips at $20, but values a unit of advanced chips at $50 (but wants at most one total unit of chips).

Creed Semi conductor

Creed Semiconductor currently dominates the market; however, Creed only has the capacity to make standard chips.Moreover, their marginal cost of production per unit of chips is $10.Creed'sgoal is to maximize profit.

Entering the Chip Market

Balboamustfirstdecidewhethertodevelopastandardchip,developanadvancedchip,orforego entry entirely. If Balboa does enter, they must then decide what price to set for their product (and Balboa must offer the same price to all customers). After Balboa determines pricing, Creed will then set the price for its own chip (and if Balboa does not enter, Creed simply chooses his price).

Will you enter the market? _______. If so, what type of chip will you develop? ___________. What price will you set?_________. What are your expected profits? _________.

(Tokeepthecalculationssimple,assumethatif dishwasherproducersareindifferent betweenthe chips offered by Balboa and Creed, they choose Balboa.)