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Case Study

What is Avon’s position in the market?

The entity operates in a relatively volatile and competitive market given the presence of firms that operate on a highly efficient and profitable scale as compared to Avon. There are seven manufacturing entities in this market, which can be likened to an oligopoly given that it possesses numerous barriers of entry despite the presence of an adequate number of players in the market. The entities can opt to collude with one another and increase the prices of their respective products, resulting in accrual of supernormal profits.

How would you compare Avon’s new EAS with the other types already in the market?

The product is not patentable and thus easily replicable by other entities in the market. It is expensive to produce. This has resulted in the decision by the entity to transfer the costs of production and margins of profitability to the consumers in the market. However, its EAS design is entirely different from those in existence in the market.

What principle does economic theory suggest Avon should use in setting the price?

Price setting is effective for the entity since it has adequate control of its specific market segment. The entity can enhance its presence in the market by developing similar products to those provided by its competitors in the market. The entity should set a high price because of the possibility of replications of its products.

What price should Avon charge? (Your recommendation)

The entity can undertake pricing of its commodities using a variety of strategies such as price bundling and leasing. Leasing takes the form of setting prices based on costs of capital associated with research and development of product for a whole year. It also includes revenues and profits for the preceding 12 months and costs that can be associated with the research and development of a new product in the third financial year. The entity should price its EAS well above $1000 to ensure the recovery of all marginal and variable costs associated with production. Additionally it should include a profit margin before the market becomes saturated with the entry of new players seeking to develop cheap replicated models.

 

 

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