Elasticities & Market Structure - Essay Example

AUTOEDGE’S DECISION The company has been rated as one of the best in terms of quality products. However, with the shift of value creation to South Korea, there was significant problem with quality. There is need as such to make strategic plan on whether to change prices upwards and return to United States with possible consequences. It is important to note that at the moment, AutoEdge is at the edge of financial bankruptcy as a result of various factors that range from management hitches to quality of its products.

It is therefore imperative that it work on a new pricing policy. The company image had significantly been affected by the new development and this means that the customer confidence had significantly reduced (Friedman, 2007). In that regard, the company has to take a critical evaluation of the possible reaction of the consumers should it change price. It is worth to note that it will make efforts to reconcile cost of production and prevailing image of its brands to make considerable profit and sustain production.

If the company returns to United States and increase prices there are likely to be a decrease in its sales. The customers have already been convinced that the AutoEdge’s products are less competitive and of questionable quality (Rajagopal, 2013). Since the United States has a culture of high quality, the existing status of the firm calls for lower prices. It is also worth noting that switching to United States means the Asian market will have been disturbed as the new product cost will likely go up.

The obvious reason is that transportation and logistics costs of the final product from United States will be reflected in increased prices and this will force customers to seek alternative companies. Prevailing macroeconomic environment in United States means there is low income capita and hence reduced consumption potential (Parkin,2007). This will definitely affect the demand of AutoEdge in the short run. However, in the long run, the company can recover and restore its brand image and convince the customers to buy at any given price.

The overall consumption trend if prices are increased would fall at first but rise steadily in the long run. Auto parts are essential component of any automobile. It is therefore important to understand the consumer behavior against the changes in prices. In this industry, quality has a critical competitive advantage as firms are many. However, the nature of the product tends to make it to be more of relatively inelastic (Mukherjee, Mukherjee & Ghose, 2003). Considering the case of Auto Edge, before it was listed has having faulty products, its sales were high despite high prices.

This shows that customer satisfaction and confidence necessitated the relative price inelasticity of demand. The existing market structure in which this firm falls is monopolistic in which individual firms have power on prices of their differentiated products but must work on the existing industry price range. In that respect, AutoEdge operates in a market where there is relative price inelasticity of demand as customers may remain loyal to a given brand despite relatively high prices provided their need gaps are filled.

This observation explains why AutoEdge will suffer revenue loss in the short run after returning to the United States before regaining consumer confidence and capturing considerable market share. References Friedman, M. (2007). Price theory. New Brunswick, NJ: Transaction Publishers. Mukherjee, S., Mukherjee, M., & Ghose, A. (2003). Microeconomics. New Delhi: Prentice-Hall of India. Parkin, M. (2007). Macroeconomics. Harlow: Addison-Wesley. Rajagopal, . (2013). Marketing decision making and the management of pricing: Successful business tools.

Hershey, PA: Business Science Reference.