Beauregard Textile Company

Eugenio J. Miravete
Relevant Market Infomation

• Duopoly in the market of Triaxx-30:

– Beauregard Textile Company (BTC).
– Calhoun & Pritchard Inc. (CPI).
• Pricing is final for each quarter (commitment) and
normally BTC announce her price first.
• BTC recently raised the price of T-30 from $3 to $4 to
align this markup to other fabrics in her product line.
• CPI held his price at $3.
• CPI and BTC have similar costs.
• CPI is in a tight financial situation.
• Products are similar but not identical.
– BTC may have a location advantage.

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Market Description

• Market remained quite stable around 225,000 yards.

• There is evidence that consumers switch suppliers to favor lower price.
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Cost Analysis

• What are the relevant cost items to consider in pricing T-30?

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Cost Analysis
• Variable costs:
– Direct Labor.
– Material.
– Material Spoilage.
– Direct Department Expense.

• Exclude expenses not related to the scale of production of T-30, or that

have been allocated following arbitrary accounting rules to cover costs
that are common to the production of other items:
– General Overhead
• Plant accounting, insurance, security, plant manager’s salary.
– Selling and Administration.
• Finnacial accounting, personnel, officer’s compensation, as well as wages of
sales people.
– Indirect Department Expense.
• Depreciation, supervision.

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Demand Analysis

• This is the present pricing arrangement where BTC charges $4.00 and
CPI charges $3.00 per yard of T-30, respectively.

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Demand Analysis

• What would happen if BTC drops her price to $3.00 to match CPI?
– Is pricing at $3.00 sustainable in the long run when total cost per yard
amount to $3.31?

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Demand Analysis

• Can BTC price at $4.00 to signal CPI of the substantial returns to

pricing high?
– Demand goes down by 20% if both firms price at $4.00.
– How do you expect CPI to react to a BTC price of $4.00?
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Competitive Analysis

• Therefore CPI makes more money by undercutting BTC’s price.

• Would you expect CPI raising her price if BTC lower his to $3.00?
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Competitive Analysis

• Therefore CPI also makes more money by matching BTC’s low price.
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Gaming Analysis

• In the current situation CPI makes almost the maximum profits

possible for him while BTC makes her minimum.
• It is in the best interest of both firms to price at $3.00.
– Obviously they could make higher profits if they simultaneously charge
$4.00, but collusion is illegal and these firms do set prices independently.
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