Week 5 Discussion 1
Good Will in Price Bidding
Sometimes, a bidder on a work contract may bid lower than what would maximize his/her profit from the contract and the reason for that is to create goodwill (to increase expected future business from the buyer). How would you value the goodwill that is obtained in this way?
Think about an example that pertains to you. If there is expected goodwill would you be prepared to bid lower to get a contract? Explain your reasons. In 300 words or more, please, provide your response to the above discussion question.
- Douglas, E. (2012). Managerial Economics (1st ed.). San Diego, CA: Bridgepoint Education.
GUIDANCE: To provide some clarity, consider (1) the definition of goodwill: That part of business value over and above the value of identifiable business assets. (2) What It Means: business goodwill is a key intangible asset that represents the portion of the business value that cannot be attributed to other business assets. Put differently, business goodwill reflects the synergy among the various assets used by the business to produce income: in a well-run business the whole is greater than the sum of the parts. (3) What creates business goodwill: here are the key factors that contribute to the creation of business goodwill: going concern value; excess business income; expectation of future economic benefits.
New Production Introduction
Bayer Schering Pharma AG, Germany owns Alka-Seltzer, which was launched in 1931 and was meant for relief of minor aches, pains, inflammation, fever, headache, heartburn, sour stomach, indigestion, and hangovers. Alka-Seltzer Plus was a spin-off of the original medicine, meant to relieve colds and flu.
The company has recently introduced a new and improved Alka-Seltzer Plus, as described in this TV ad.
The ad shows that Alka-Seltzer Plus can fight congestion, unlike NyQuil.
Explain how Alka-Seltzer Plus has been quality and price-positioned in an existing market. In your opinion, has Bayer positioned their product appropriately in the market for cold and flu symptoms relief products? Would you advise Bayer to use a skimming or a penetration pricing strategy? Explain your reasoning.
How do you think Proctor and Gamble, the company who produces Vicks NyQuil, would respond to the ad?
In 300 words or more, please, provide your response to the above discussion question. If Bayer is currently making normal profits on most of the products in its product line, but is making pure profits on its new Alka-Seltzer Plus with decongestant, what should Bayer do to increase its profits?
The Cold Truth about Stuffy Nose Relief — Alka-Seltzer Plus Night Cold & Flu. Video – Bayer AlkaSeltzerPlus. (2012, September 27). YouTube. Retrieved November 13, 2012, fromhttp://www.youtube.com/watch?v=668ufoaCPB4
GUIDANCE: To provide some clarity, consider:
Two components to Normal Profits
Explicit Costs—Tangible costs like rent, wages, utilities, insurance, freight…
These are also known as Accounting Costs
Implicit Costs—These are somewhat intangibles costs—They are the entrepreneurs OPPORTUNITY COSTS
How much could the entrepreneur earn doing something else AND how much could he “rent out” his capital for if he was not using it.