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Abstract Determining price levels and pricing policy affects revenues and consumer demand and thus remains one of the most important elements in determining profitability and market share Part of the pricing process involves the anticipation of competitive reactions to price changes and its economic effects on supply and demand This paper examines the effect of a price reduction strategy on product X given a hypothetical business situation The paper discusses the business situation and provides an estimated change in profit with and without a competitive response given data received from marketing general management and accounting The final section concludes the paper Business Situation In an earlier memorandum product management requested data from marketing general management and accounting to help evaluate the effect of a proposed 10 price reduction on product X see appendix A Key data extracted for the evaluation is as follows Marketing Price Elasticity Calculation PriceQuantity DemandedPrice Elasticity 5007 450925 absolute value Q 7-9 79 2 -28 -25 P 500-450 500450 2 50475 10 Elasticity QP -25 10 - 25 elastic Therefore if price decreases by 1 quantity demanded increases by 25 Given a price elasticity coefficient of 25 and a 10 price decrease expect a 25 increase in quantity demanded QPE E PQ 251025 Marketing expects competitors will lower prices in response to a price reduction General Management Minimum profit margin of 30 annually Accounting Under elastic demand given a 10 decrease in price and a 25 increase in quantity total sales revenue TSR will increase by 35 TSR P Q 25 10 35 Note where demand is elastic total consumer spending moves in the opposite direction to price Lieberman 2000 The total amount of consumer spending is also the total sales revenue Lieberman 2000 Therefore given general managements profit target of 30 total revenue of 3500 5 price x 7 units of output at
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