Products, Services, And Prices In The Free Market Economy

Running head: PRODUCTS, SERVICES, AND PRICES IN THE FREE MARKET ECONOMY

Products, Services, and Prices in the Free Market, Economy

University of Phoenix

MBA/501 Ð'- Forces influencing Business in the 21st Century

Instructer: KHALID ABDALLA

Week 2 - February 25, 2006

Introduction

The U.S. automotive market is the most competitive automotive market in the world. With total vehicle sales of nearly 17 million the market is also the largest. The problem for the automotive industry, and especially the US domestic automotive industry, is that there is little if any growth in the total demand for automobiles in the United States. The total year over year sales increase for the past 6 years has essentially remained unchanged with sales of 16,879,000 units in 1999 and just 16,865,000 in 2005 (Bureau of transportation Statistics, 2006). This stagnation in demand creates a very competitive price structure environment as the industry tries to maintain or increase its market share in the face of aggressive foreign competition.

Problem Statement

Daimler Chryslers' Chrysler group can realize increased market share and profit US market through aggressive price strategies and the introduction of new exciting products that delight the customer.

In order for Chrysler to achieve the goals in the problem statement above, Chrysler must first identify relevant information that can help the corporation make intelligent informed decisions. Of all the information available one of the first places Chrysler should look is the predicted demand for automobiles. Demand for vehicles in the United States will not increase as the economy recovers. The lack of increase in demand is due to the automotive industries cushioning of the downside of sales during the earlier recession by offering high incentives and low financing "We will probably not find a high degree of pent-up demand" ("Ballew: Industry lacks pent-up demand," 2003).

Risks

The challenge to Chrysler will be pricing. A slight up tick in demand, due to the increase in population may allow Chrysler to reduce sales incentives, but overcapacity will offset any increase in demand and therefore put upward pressure on incentives. ("Ballew: Industry lacks pent-up demand," 2003). While Chrysler begins to invest in new products that will Ð''delight the customer' as well as to develop an aggressive price strategy, Chrysler will need to understand the risks. These risks include losing customers to competitive automotive brands. Common sense would dictate that automobiles are complimentary products within the industry, that if the price of one manufactureres product increases, then the entire industry would be able to increase prices. However, in the US due to the constraints imposed on the domestic industry by the legacy costs including huge retirement obligations, it becomes clear that domestic manufacturers are at a large price disadvantage. Therefore, as the price increases for the domestic brands, the imports demand will rise making each manufacturer a substitute for the others.

Another concern for Chrysler will be the inelasticity price of demand of its automobiles. As shown in the equation for elasticity, Chrysler's percent change in sales of .0418 divided by the percent change in price of .4 is equal to an in-elasticity of 0.1. Due to this price inelasticity of demand, Chrysler will have difficulty increasing its revenues, even as demand increases. According to the Hodgetts, Luthans, and Doh, when the price demand is inelastic, the total revenues begin to decrease as demand increases.

One other risk to Chrysler will be the continued pressure to reduce prices even further. If demand remains the same but the supply increases there will be a corresponding decrease in equilibrium price and increase in equilibrium supply producing a downward pressure on price, thus producing a need for incentives which will further