solution

CASE STUDY

The tyre case: Analysing your situation to make good pricing decisions

BY ELIZABETH GUNNER

Four different companies decide to enter the tyre market. Each company decides to produce a different product and, although their raw materials are exactly the same, the competition and demand for each market is quite different:

■ Company A produces standard car tyres: demand is high but there are lots of established competitor brands including a few large-scale producers that control prices.

■ Company B produces special tyres for army tanks: they are contracted by the government, and so they have only one customer and no competitors but the contract will be reviewed annually.

■ Company C produces tyres for four-wheel-drive vehicles: demand is lower than for standard car tyres, but there is less competition.

■ Company D produces tyres for fixed-gear bicycles: a growing market with few established competitors but with a growing number of new producers entering the market to meet growing consumer demand.

1 What are the different price-setting techniques that the companies could use to set their prices?

2 Select one pricing method for each firm and give a reason (or reasons) why you think this would be the most appropriate method.

3 Think about the differences in the customer base for each product. Which types of tyres would be more price elastic and why?

4 Carbon black is one of the key raw materials used to make tyres. The cost of carbon black has increased signi‑cantly, causing an increase in the production costs for all four tyre companies.

a Would this be an increase in fixed costs or variable costs?

b If all four companies raised their prices in response to the increased production cost, whose sales do you think would be most affected and why?

5 Company D is considering a temporary price promotion. List some scenarios where this could be a benefit for the company