Bulls Eye department store specializes in the sales of discounted clothing, shoes, household items, etc. similar to the offerings at a regular Walmart or Target. Bulls Eye is the only department store in Show Low and the nearest other discount retailer is Target, located 49 miles away in Eagar. Bulls Eye, therefore, has some market power in its local area. Despite having some market power, Bulls Eye is currently suffering losses. An analyst at Bulls Eye is recommending to the manager to raise prices, so that profitability can be improved. The manager is unsure of this strategy as recent data points to increasing numbers of individuals shopping more and more. What are the pros and cons of raising the prices at Bulls Eye and would that strategy be profitable?
Consider demand elasticity and market structure in your response. How is increasing of the price going to impact the company’s revenues given its demand elasticity?
The market structure and market demand curve strongly influence the pricing strategy of a firm. For instance, only a few firms are operating in a market and the shape of the market demand curve is steep, then an increase in price will increase both revenue and profit. However, if several firms are operating in the market and selling similar goods or services, then the demand curve will be flat, and an increase in price will reduce sales/revenue/profit. Therefore, for a potent and effective pricing strategy, it is imperative to consider some factors (Landsburg, 2012).
In the case of Bulls Eyes, it is apparent that the firm has extraordinary market power. It is the only store with a radius of 49 miles which sells discounted products or goods. It suggests that Bulls Eye has a sort of monopoly, which allows it to experiment with prices as monopolies are price makers.
As the demand curve for this market is steep, any increase in price will increase profits. However, if the Bulls Eye begins to make a positive economic profit, it will attract other firms and the number of firms will continue to increase until the economic profit becomes zero. Entry of new firms will make the demand curve steep and push prices downwards, which will reduce profit (Mankiw, 2011).
In my opinion, Bulls Eye should increase prices, as in the short run, it will increase both revenue and profit for the Bulls Eye, which is essential to operate. The financial/market position and capital structure of Bulls Eye would be improved by the time new firms would start entering this small market.
As the demand curve for this market is steep, new firms will enter the market sooner or later. That is why Bulls Eye must devise a strategy to benefit, as much as possible, from its market position, which will change after the entry of new firms.
References
Landsburg, S. E. (2012). The Armchair Economist: Economics and Everyday Life. Simon and Schuster.
Mankiw, N. G. (2011). Principles of Economics. Cengage Learning.
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