Quasar Computers Company’s Economic Strategies Coursework

Introduction

In order to earn economic profit on a sustainable basis the firm must consider the market structure and then choose from the pool of strategies available. The following provides the strategies to be opted by Quasar computers at different stages.

Main Body

Phase 1: Neutron being a technological innovation enjoys market monopoly. Therefore, the market structure in which Quasar Computers operates is monopolistic in structure. In order to maximize profit in monopolistic market, the economic solution is to equate marginal revenue to marginal cost, which will provide the profit maximizing price and quantity derived from the demand curve. In case of Quasar Computers, for Neutrons, the profit-maximizing price is $2550 and quantity demand at that price is 5 units.

Phase 2: The profit-maximizing price is good at a situation where there is effect of advertisements and consumer choice on product buying decision and that are no close substitutes. However, optical computers have close substitutes in traditional microchip based computers. Therefore, for a new product advertising budget and price according to it must be considered. Therefore, we have two aims:

1. advertising budget,
2. pricing strategy to maximize profit.

If we keep, last year’s advertising budget i.e. 400, the price of the computer must come down to $ 2350 wherein the company earns a profit maximizing profit of $1.34 billion. Reducing the cost of advertising is not an option as in both the cases as suggested by Jane, we earn either negative profit (in case of advertising cost $100 billion) or lower profit than what we may earn by retaining last year’s advertising cost. Therefore, I decided to take Robert’s suggestion. The reason for this decision is – (a) we have to increase awareness and acceptance of the new technology to increase market, and (b) earn higher profit.

I decide to increase the advertising expenditure from $400 billion to $ 600 billion. At $500 billion advertising cost, the company sells the product at a price of $2350 and earns a profit of $1.91 billion. However if the cost of advertising is the price of the product is $2450 and earns profit of $2.74 billion. Moreover we sell maximum number of units at this pricing (i.e. 16.6). Therefore I decide that the advertising cost must be $600 billion and price of the product $2450.

Phase 3: In this phase, the target is to streamline manufacturing facilities to minimize costs. Aim is to select best production proposal for Quasar and accordingly set the pricing for Neutron. When we do no change in production process, the price of Neutron is $2300 and 8.8 million units are sold. The profit earned is $0.68 billion.

First, we will check the proposal of Dave who suggests upgrading production process. This will lower the average cost and marginal cost of production. Setting the price at profit maximizing level we see that the price of Neutron becomes $2200 and units sold 9.4 million. The cost of production is $18.53 million and profit is set at $2.2 million.

If we consider the suggestion of Jane wherein she suggests to specific improvements, we see that the cost of production becomes $18.77 billion, which is higher than that required to upgrade production systems. Further, the price of Neutron remains at $2300 with fewer units sold (8.8 million) and profit falls to $1.52 billion. Therefore, the best decision to minimize cost and maximize profit is to opt for Dave’s suggestion to upgrade production process.

Phase 4: New entrants in market increasing competition. Orion Technologies is the new entrant. Market structure becomes oligopolistic in nature. Aim: Orion’s price for next month and Neutron’s counter price.

The pricing strategy if Neutron will be at $1750 wherein the company’s profit will be $56 billion and a market share of 50%. My strategy is to set the price at $1750, which is the predicted price for Orion in order to stabilize the price in the market in order to prevent a price war or slump in the market. This has helped me retain 50% market share and a profit of $56 billion.

Phase 5: Market structure is Monopolistic Competition. The aim is to decide if Neutron brand must be built or launch a new product Ceres. I decide to launch a new brand Ceres. This is because it will maximize our combined profit to $1305 million with no unused capacity. This will also help Quasar differentiate its products and sell computers in an already competitive market.

Phase 6: The aim is to allocate budget for continuous improvement. The aim will be to reduce cost of production. First, I decide of investing $40 million on process improvement. The semiannual report shows that per unit profit earned is $0.20. Next, I decide to decrease the profit improvement cost to $30 million, which helped in increasing profit per unit and reducing cost and savings.

The pricing strategies that should be considered are as follows:

1. Profit maximization is the strategy to opt in case of monopoly where in price is set at marginal revenue equals to marginal cost.
2. Combined profit optimization, in case of oligopoly in order to maintain stable price in market.
3. Pricing strategy should aim at removing excess capacity in monopolistic competition.
4. Cost reduction as prices are set by market in perfect competition through the forces of demand and supply interaction in the market.

Conclusion

Some non-pricing strategies that I recommend are – increasing cost of brand promotion and advertising for new launch of a model, continuous improvement in order to reduce cost, and increased R&D expenditure to help product differentiation.

Innovations that will help the company differentiate its Neutron from its competitors will help the company sustain its competitive position.

Reference

McConnell, C. R. (2009). Economics: Principles, Problems, Policies, 18e. McGraw-Hill. Web.

Simulation. (2009). Market Structures. Web.

UOP. (2009). UOP-custom course for Basic Business Statistics. Web.