Nonprice Competition
General Cereals, Inc. (GCI), produces and markets Sweeties!, a popular ready-to-eat breakfast cereal. In an effort to expand sales in the Secaucus, New Jersey, market, the company is considering a 1-month promotion whereby GCI would distribute a coupon for a free daily pass to a local amusement park in exchange for three box tops, as sent in by retail customers. A 25% boost in demand is anticipated, even though only 15% of all eli- gible customers are expected to redeem their coupons. Each redeemed coupon costs GCI $6, so the expected cost of this promotion is 30¢ (= 0.15 x $6 3) per unit sold. Other marginal costs for cereal production and distribution are constant at $1 per unit.
Current demand and marginal revenue relations for Sweeties! are
Q = 16,000 - 2,000P
MR = DTR/DQ = $8 - $0.001Q
Demand and marginal revenue relations that reflect the expected 25% boost in demand for Sweeties! are the following:
Q = 20,000 - 2,500P
MR = DTR/DQ = $8 - $0.0008Q
A. Calculate the profit-maximizing price/output and profit levels for Sweeties! prior to the coupon promotion.
B. Calculate these same values subsequent to the Sweeties! coupon promotion and following the expected 25% boost in demand.