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The market for digital cameras is relatively new. Ajax Inc. produces what it regards as a high-quality digital camera. Knockoff Inc. produces what it regards as a low-quality digital camera. However, because the market is so new, reputations for quality have not yet developed, and consumers cannot tell the quality difference between an Ajax digital and a Knockoff digital just by looking at them.
If consumers knew the difference, they'd be willing to pay $200 for a high-quality camera, and they'd be willing to pay $100 for a low-quality camera. It costs Ajax $85 to produce a high-quality camera, and it costs Knockoff $55 to produce a low-quality camera.
A recent MBA hire at Ajax suggests that Ajax could differentiate its camera from Knockoff's by offering a full-coverage warranty (which would fully cover any defect in the camera at no cost to the customer). The MBA estimates that it would cost Ajax $20 per year to offer such a warranty. The MBA also estimates that it would cost Knockoff $40 per year should Knockoff attempt to copy Ajax's warranty strategy. Consumers will feel that the camera with the longest warranty is high-quality and that with the shortest warranty is low-quality. The camera companies want to maximize the profit per camera.
What is Ajax's profit per camera in the digital camera market?
The sales information for the Lonestar Sports Apparel Corporation for the last 12 years as follows:
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