Furniture manufactures popular line of filing cabinets

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Reference no: EM132242208

Marlin Office Furniture manufactures a popular line of filing cabinets and has a very strong competitive position in its market. The company sells its product to a number of wholesale distributors who, in turn, sell to retail customers. In this environment, the company faces a demand curve of the following form of Q1 = 20 - 0.6P1 where P1 denotes its selling price and Q1 denotes the volume (in thousands) sold at that price.

Marlin’s total cost is 0.8(Q1)2/2.) Costs rise non-linearly as volume rises because of shop floor congestion.

One of Marlin’s distributors is a subsidiary known as New England Supply. They represent Marlin’s exclusive distributor in the northeast, and the parent company allows them to operate as an independent entity, focused on distribution. They buy filing cabinets from Marlin and sell them to retail customers in the northeast. In that market, New England Supply faces its own demand curve as follows: Q2 = 10 - 0.2P2 where P2 denotes the retail selling price and Q2 denotes the volume (in thousands) sold in the northeast at that price.

New England Supply’s total cost is P1Q2 + 0.4(Q2)2/2. (remember P1is what Marlin charges New England for each unit)

(a) Suppose that Marlin Office Furniture and New England Supply each analyze their own pricing strategies separately. That is, Marlin finds its profit-maximizing price. Then New England Supply, whose cost is influenced by Marlin’s price, maximizes its own profits. What is each firm’s optimal price and how much profit is earned between the two companies?

(b) Ensure the price for Marlin in (a) is a global optimum by plotting the profit for prices from $1-$30.

(c) Suppose instead that the two firms make coordinated decisions. In other words, they choose a pair of prices, one wholesale and one retail, aimed at maximizing the total profit between the two firms. What is each firm’s optimal price in this coordinated environment? How much profit is earned between the two companies?

Reference no: EM132242208

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