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Pricing Questions on Cigarattte, Hospital Insurance And Reverse Osmosis Assessment Answer

Question: Pricing

Briefly describe the lessons learned from the following examples given in chapter 7. (Page Limit : 1

page total)

• Cigarettes (7.3)

• Reverse Osmosis Membrane (ROM) (7.4)

• Hospital insurance (7.5).


Question: Pricing

• Cigarettes

In the given case study Phillip Morris decreases the price of its cigarettes by 40% in order ti increases its market share in one-none competition with B.A.T. However, B.A.T responds quickly to the Morris strategy and decreases its price by 50%.  The case study gives the lesson that price should not be used as a competitive weapon to increase the markets share of the products. If the competitors act quickly and follows the similar strategy of price cut, “Tit-for-tat”, the strategy will fail badly. This will not result increase in market share of the product but will instead result in lower profits and loss of capital. The pricing of the product should be kept at sustainable levels.

• Reverse Osmosis Membrane

The given case study Dow Chemicals enjoyed monopoly in the market of membranes in U.S. however after the entry of Japanese competitor which sold the membranes at nearly one third of the prices Dow uses forgiving and aggressive pricing strategy to motivate the competitor to increase the prices of the product. However, the competitor did not respond to the strategy and Dow had to retract to reduced pricing. The reason was the low cost of production of Japanese company which made it sustainable to continue with the low prices. The lesson learned in the case study is to understand first the reason behind the low pricing of the competitor and then use the appropriate strategy. The aggressive strategy can motivate the competitor to increase its production capacity and increase the market share. In order to achieve competitive advantage there should be either differentiation of the product or effective cost management using unique methods or advanced technology.  

  • Hospital insurance 

The case study shows that MFN contact between most of the hospitals and the BCBSM (Blue Cross Blue Shield of Michigan) led to discriminatory prices of the hospital services and medicines by the hospitals to other private insurers. This made it difficult for other insurers to survive and led to monopoly of BCBSM. The lesson learned from the case study is that in order to improve the services it is necessary to have fair competitive market for the business. The competitiveness can exist only when the supplier and purchaser are unrelated and do not have favored contracts with each other. The MFNs contract lead to biased pricing and hence deters the positive completion in the market resulting in poor services. 

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