Greener Grass Company (GGC) competes with its main rival, Better
Lawns and Gardens (BLG), in the supply and installation of in-ground
lawn watering systems in the wealthy western suburbs of a major
east-coast city. Last year, GGC’s price for the typical lawn system was
$1,995 compared with BLG’s price of $2,100. GGC installed 9,130 systems,
or about 55% of total sales and BLG installed the rest. (No doubt many
additional systems were installed by do-it-yourself homeowners since the
parts are readily available at hardware stores.) GGC has substantial
excess capacity—it could easily install 25,000 systems annually, as it
has all the necessary equipment and can easily hire and train
installers. Accordingly, GGC is considering expansion into the eastern
suburbs, where the homeowners are less wealthy. In past years, both GGC
and BLG have installed several hundred systems in the eastern suburbs
but generally their sales efforts are met with the response that the
systems are too expensive. GGC has hired you to recommend a pricing
strategy for both the western and east¬ern suburb markets for this
coming season. You have estimated two distinct demand functions, as
Qw = 1,035.548 - 6.07164Pgw + 2.83Pbw + 2,100Ag - 1,500Ab + 0.2348Yw
for the western market and
Qe = 49,714.29 - 30.7692Pge + 6.984Pbe + 1,180Ag - 950Ab + 0.0825Ye
for the eastern market, where Q refers to the number of units
sold; P refers to price level; A refers to advertising budgets of the
firms (in millions); Y refers to average disposable income levels of the
potential customers; the subscripts w and e refer to the western and
eastern markets, respectively; and the subscripts g and b refer to GGC
and BLG, respectively. GGC expects to spend $1.5 million on advertising
this coming year and expects BLG to spend $1.2 million on advertising.
The average household disposable income is $55,000 in the western
suburbs and $25,000 in the eastern suburbs. GGC does not expect BLG to
change its price from last year, since it has already distributed its
glossy brochures (with the $2,100 price stated) in both suburbs, and its
TV commercial has already been produced. GGC’s cost structure has been
estimated as TVC = 755.363Q + 0.005Q2 where Q represents single lawn watering systems.
a. Derive the demand curves for GGC’s product in each market.
graphically the demand and MR curves for each market, and also show
GGC’s combined marginal revenue curve (MR) and its MC curve. Show
graphically the quantities that should be produced and sold, and the
prices that should be charged, in each market.
c. Confirm your quantity and price results algebraically.
the price elasticities of demand in each market and discuss these in
relation to the prices to be charged in each market.
a short note to GGC management outlining any reservations and
qualifications you may have concerning your price recommendations.