Value Gap Advantage, Added Value, Excluded Customers & Profitability

2. To expand or not to expand; that is the question? You operate in a market with the following characteristics: There are SIX customers with WTP of $ 160, $150, $140, $130, $120 and $105 respectively.

You, Firm Uno are the most efficient of the three firms. Your capacity is THREE units and your unit cost is $100 per unit. Your nearest competitor Firm Duo can at most manufacture ONE unit at a cost of $ 105 per unit and the second competitor, Firm Trois can manufacture at most TWO units at a cost of $120 each.

1. What is the Profit potential for your firm if this market is an unrestricted market?

2. If the Price of the product is uniform, i.e. every customer pays the same Price, how much Profit can you expect to make?

You clearly have a Value Gap Advantage vis--vis firm Trois ($ 20 per unit) as does Firm Duo ($ 15 per unit). Both you, Firm Uno and Firm Duo decide to expand your output by ONE unit each (to FOUR & TWO units respectively) to press your advantage.

1. What is the Profit potential for your firm if this market is an unrestricted market?

2. If the Price of the product is uniform, i.e. every customer pays the same Price, how much Profit can you expect to make?

Here again, the result at first seems counterintuitive. Give me a verbal justification for why this outcome is true?