Reference no: EM132364758

Question

Drake Transport Ltd is one of eight suppliers of cross-border road transport to the SADEC region. The company's pricing structure is quite simplistic. The company charges a single fixed price per 1 000 kg irrespective of the article to be couriered. The other competitors in the industry apply the same pricing structure although the prices of some competitors are slightly higher, while others are slightly lower than Drake's. There is no specific price leader in the group of competitors. The graph below illustrates the demand curve for Drake's services (DDT) as well as the demand curve for the industry (DIND).

Drake's management is of the opinion that its price per 1 000 kg is too high, making Drake uncompetitive. Management is considering a 12% reduction in the price per 1 000 kg. The company believes that it will attract more customers, that the company will increase revenue and profits and that the other competitors will not follow suit because they will not be willing to forfeit their current levels of revenue and profits.

Required

Apply the kinked demand curve model presented by Paul Sweezy to illustrate and explain to Drake's management the probable consequences for the company if they reduce the price. Assume that the market is currently in equilibrium at point E. You don't have to redraw the graph.