Answer the following questions in your text and submit the answers and any supporting spreadsheets to the Week Five Dropbox.
Application Question 2, page 255
The following paragraphs provide a description of the competition between Home Depot and Lowes on selling flowering plants:41
41 Miguel Bustillo, The Garden Gloves Come OffBig Box Retailers Battle to Engineer Prettier, Sturdier, Longer-Lasting Blooms, Wall Street Journal (Online) April 27, 2011.
In the spring Home Depot and Lowes engage in an annual arms race to engineer and develop new scientifically altered versions of common flowering plants that are designed to bloom brighter or withstand neglect longer. The goal in particular is to sell something the other guy doesnt.
Home Depot is the worlds largest home-improvement chain with $68 billion in annual revenue, while Lowes is the second-largest with $49 billion in annual revenue. Although spring is the peak selling season for all merchandise, plants and trees are used to entice consumers into the stores. Analysts estimate that for every dollar customers spend on plants, they spend $3 on accessories such as hoses, shovels, and gloves. Both companies employ weather forecasters to advise them on when plants should appear in stores in different parts of the country.
Lowes uses a team of Ph.D. horticulturalists to choose among a thousand possible blooms developed by breeders around the world. After determining how the plants grow in different climates, the growers test mass production of hundreds and then thousands of plants. Both retailers try to secure exclusive rights to popular new varieties, although sometimes they are exclusive in name only.
Lowes uses a greenhouse complex in Huntersville, NC to grow plants and conduct consumer focus groups where customers can identify the flower varieties they most admire. Home Depot uses another greenhouse complex in Mills River, NC, two hours west, for the same purpose.
Discuss how the oligopoly models presented in this chapter apply to the behavior of Home Depot and Lowes.
Application Question 3 , page 287
The following discussion pertains to the pricing policies of Linear Technology Corp.:65
65 George Anders, In a Tech Backwater, a Profit Fortress Rises, Wall Street Journal, July 10, 2007.
The semiconductor industry Linear Technology Corp. has maintained strong profitability by operating at the fringes where competition is low and margins are high. This midsize company makes 7,500 arcane, unglamorous products that solve real-world problems for a long list of customers, including analog chips that are too cheap for customers to haggle over, but perform chores too important to ignore. Many of Linears chips cost less than 50 cents to build and sell for three to four times as much, but customers seldom complain about the markup.
Linear made a 39% profit on its $1.1 billion sales in 2006, more than five times the average for U.S. industrial companies. However, other bigger chip makers, including Texas Instruments Inc., Richtek Technology Corp. of Taiwan, and Freescale Semiconductor Inc. of Austin, Texas, are now moving into the market and others may follow suit. Unlike in the digital chip world, in which a single winning design bought by a few big customers can yield huge profits, Linear would rather see its order book packed with small to midsize orders from companies too busy to haggle over prices. Intermec Inc., which makes mobile data scanners, uses Linear chips to obtain extra life from its devices batteries. The chips total cost is less than 5% of the materials budget. Performance is crucial for this company; price is not.
Traditionally the dozen or so major analog chip companies have tiptoed around one anothers product lines, helping keep profit margins high. Each company established its strength decades ago, making it easy to extend existing product families and deepen relations with longtime customers. We chip away a little at each others specialties, says Jerald Fishman, chief executive of Analog Devices. But there isnt a lot of direct competition.
Discuss how price elasticity of demand influences the pricing strategies of Linear Technology Corp. What market model best describes this industry? Explain.
