Some marketing consultants argue that cents-off coupons are more effective in reducing retail prices than cuts in wholesale prices. They believe that retailers would absorb cuts in wholesale prices instead of passing the price cuts to consumers. By contrast, they believe that consumers would benefit fully from coupons.

(a) Consider the retail market for a brand of shampoo. Using relevant demand and supply curves, illustrate the market equilibrium at a price of $4 per bottle and a quantity of 500 million bottles a year. (Hint: You are free to assume any data necessary to draw the curves.)

(b) Suppose that the manufacturer cuts the wholesale price by 25 cents. Draw a new retail supply curve, shifted down by 25 cents. Identify the new equilibrium quantity and price.

(c) Suppose, instead, that the manufacturer distributes 25-cent coupons and that all consumers use these coupons. Draw a new retail demand curve, shifted down by 25 cents. Identify the new equilibrium quantity and price.

(d) Compare the equilibria under (b) and (c). Do you agree with the marketing consultants?