Beauragard – a Textile Company Case
Beauregard is a Textile Company (BTC) is one of the largest firms in textile industry with annual sales of about $82 million. BTC has recently increased the price of one of their products the Triaxx-30 (T-30) from $3 to $4. This increase in price was due to the increase of costs associated with that product. The current market for the T-30 is a duopoly with Calhoun & Pritchard Inc (C&P). as the only other supplier.
C & P normally wait for for BTC to announce their price for BTC before announcing their price. C & P retained their price of $3. This caused BTC to lose market share. The current problem faced by the BTC executives is whether to reduce the price back to $3 to regain market share, or to remain at $4 in order to maintain profits.
BTC owned close to 56% of the market share for T-30, while C & P owned 44% of it. Customers of the T-30 are price sensitive. Therefore, they immediately moved to C & P which resulted in loss of market share for BTC. Now BTC has 33% of the market share while C & P has 66%.
An Important note is that since the market is inherently price sensitive, it is estimated that the market size will shrink by 20% if both suppliers increase their price levels.
Questions:
1- Does Calhoun & Pitchard have an incentive to change its price?
They do not have an incentive to change their price. Just by looking at Exhibit one, in 1988, when C & P increased their price, their estimated Sales Volume dropped from 100,000 to 25,000.
2- Based on your answer to question 1, should Beauregard change their price?
There are some important points to consider:
The Market for the T-30 is a Duopoly, with C & P and BTC
Prices are final, and announced at the beginning of each quarter.
BTC announces their price for the quarter first.
There are 4 possible scenarios:
Scenario 1: Remain the same BTC prices at $4 while C & P prices at $3. This scenario, although C & P will have higher market share, their profit margins arenot that good. BTC although they have a lower market share, they are still able to cover their costs and make good profits due to their higher price. Also, this also doesn’t result in shrinkage of the market size by 20%.
Scenario 2: BTC reduces its price to $3, and C & P remain at 3. In this scenario BTC will mostly regain their market share but may not be able to cover their costs through the price. No Shrikage in the market with occur.
Scenario 3: BTC reduced their price to $3, and C & P increase their price to $4. In this
scenario, BTC will not be able