Essay Example on Four Star Motorsports

Using regression, estimate the demand curves for each type of tire in each type of demand season (low, medium, high). I recommend that you use Excel to do the regressions. (Note: demand for the two sizes of tire are independent from one another). Yokohama Winter Rally Tire Demand Curve | WR 26 155/65R13| WR 26 185/65R14| Normal Demand| Q=106. 4-0. 544P| Q=104. 8-0. 448P| High Demand| Q=86. 28571-0. 33143P| Q=94. 714-0. 3314P| Low Demand| Q=155. 2-0. 704P| Q=132. 8-0. 704*P| * What is the optimal “one-price” policy for Sprongl’s rally tires if he sticks with his “base prices” for the entire year? (Assume his goal is to have no residual inventory and to maximize total revenue).

Tire Type| WR 26155/65R13| WR 26185/65R14| Inventory| 280| 265| | | | Price| $150. 82| 159. 8190703| | | | Period 1| 49. 02| 20. 29| Period 2| 24. 35| 33. 20| Period 3| 36. 30| 41. 61| Period 4| 24. 35| 33. 20| Period 5| 36. 30| 41. 61| Period 6| 24. 35| 33. 20| Period 7| 36. 30| 41. 61| Period 8| 49. 2| 20. 29| | | | Demand| $280. 00| 265. 00| | | | | | | Revenue| $42,229. 98| $42,352. 05| * If Sprongl elects to use “dynamic pricing” by changing prices for each tire in each season, what are the optimal prices if his estimated demand curves are estimated correctly? (Note: there is no global optimum solution for this in Solver but several “local optima” that are similar.

I recommend that you calculate the optimum pricing for each tire separately, and then sum the total revenue from each). * What are the pros and cons of fixed and dynamic pricing in this situation?

Explain your reasoning. Fixed pricing: Pros: 1. Fixed pricing establishes optimal “one-price” policy for Sprongl’s two different rally tires. There will be neither haggling nor competition from other period’s price. 2. There will be no arbitrage so that Four Star Sports can easily predict and monitor the inventory.

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Cons: Resulting either in money left on the table or lost sales Dynamic Pricing: Pros: http://news. wustl. edu/news/Pages/4382. aspx http://smallbusiness. chron. com/dynamic-pricing-strategy-5117. html http://faculty. insead. du/popescu/ioana/Papers/PopescuWu. pdf http://www. meiss. com/download/RM-Maglaras-Meissner. pdf 1. Dynamic pricing strategy enables Four Star Motorsports maximize the profit margin and maximize the revenue from *** to *** Cons: 2. The dynamic pricing needs comprehensive data and testing to work well, in this case, we only had very limited data to find our dynamic pricing strategy, which might not reflect the true demand curve. 3. It also requires advances in point-of-sale technology and widespread adoption of electronic labels for inventory management.

This may increase the cost dramatically. Considering Four Star Sports is a family business, and their revenue may not be high enough to support this expense on new technology. 4. Customers might feel unfair that the same products are charged at different prices. 5. The dynamic pricing may lead to arbitrage, customers with high price elasticity may shift to the low price period to purchase the rally tires; On the other hand some smart people may purchase more than they need during the low price period then to sell at high price period.

These will change the demand curve and the competition environment dramatically and influence the inventory management. 6. Dynamic pricing strategy suits frequent purchased consumer goods market better, because the customers’ purchase decisions are heavily influenced by the past observed price. In this case, customer may not purchase rally tires very often, thus the history price has less influence on their decision making.