You work as an analyst for the electronics manufacturing firm Hypra!!!, based in Japan. Hypra!!! started as a textile manufacturing firm in the 1950s but from the 2000s it switched to produce the product called x, a high-tech gadget, extremely popular in Japan, but less so in other countries (yet). There are two main groups of consumers who are interested in x. First, teenagers use it for gaming. Second, middle-aged managers are also keen to use it as a personal assistant, not unlike Siri on Apple devices.

Currently, four firms are producing x. Hypra!!! has a 38% market share. The x is sold both by specialist stores and the large hypermarkets across Japan. The most important component of the x is called chip+++, which requires a very specific technology, and, therefore, is only produced by two Japanese suppliers, working strongly together with the x producers.

A new version of the x tends to be introduced every second year. Hypra!!! has always been the most innovative of the four firms, regularly patenting new technological solutions to make its product distinct. This year it has patented a radical innovation, the fold-up x (generation 7), which is already a hit, even though it has not been introduced. Besides its technological features, consumers can readily recognise Hypra!!!s products from the signature three exclamation marks.

Regarding the future of the firm, its CEO, a 74 years old veteran manager with a long history in the semiconductor industry, considers two expansion strategies. The first is to make an attempt to conquer European markets either by exporting x there from Japan or setting up a production unit in one of the new EU member states. New EU member states would welcome a Japanese investment with tax holidays and some of the able chipmakers in those countries would be happy to produce chip+++ or even x itself, especially if Hypra!!! supports them in learning the necessary skills. Alternatively, the CEO considers buying one of the Japanese chip+++ suppliers to secure the supply chain.

The firm has commissioned an analysis of the demand function for its product (the 6th generation). The demand function was estimated with regression analysis which partly relied on machine learning methods. The estimated demand function is:

QHypra= 800 - 2PHypra + 2Inc + PComp Psoftware + 10 Adv

Where

Q = the quantity demanded from Hypra!!! x (million)

PHypra = the price of Hypra!!! x (in )

Inc = total income (in trillion )

PComp= the average price of the 3 competitors (in )

Psoftware= the price of the software needed for x (in )

Adv = Advertising expenditure (in million ).

Presently: PHypra=200 , Inc=50 trillion , PComp=200 , Psoftware=100 , Adv=10 million .

The CEO of the firm asks you to write a report about the firms situation. He is especially interested in 4 questions.

1. The first question concerns the key elasticities and their economic meaning. He is especially interested in how a large fall in income predicted to be 20% -- will affect the demanded quantity.

2. Discuss what is the likely market structure of the x market. The CEO mentions that there is a chance that one of the competitors (with a 22% market share) will attempt to cut the price (of generation 6) aggressively this year. Describe the expected effect of the price cut and the options available for Hypra!!! in that situation.

3. The firm has not decided yet about what pricing and marketing strategy to apply when it introduces generation 7 (fold-up) X. Please discuss these options and the factors that should be taken into account.

4. Consider the different types of expansion which the CEO considers. First, state what type of expansions they are. Second, discuss the advantages and disadvantages of the different options and also the type of information that should be collected to decide on which strategy to pursue.