The firm ALFA is known around the world for its high-quality watches, and they sell for a unit price of $9,000. However, ALFA are seeing the emergence of Asian ALFA-copy-products in their market as an increasing problem. The copy-product-makers are getting more skilled, and consumers, who are aware of the existence of the copy-products in the deal, can by buying a watch not actually see the difference an ALFA-watch and an ALFA-copy-product. The latter product, however, is of much lower quality than the real thing.
In ALFA’s analysis-department they have investigated the consumers willingness to pay for ALFA-watches, which is found to be $10,000. They also have clear knowledge of the willingness to pay for a copy-product, which is $1,200. A representative sample shows that the proportion of copy-product watches in the market for ALFA-watches is 4%. Suppose that consumers are risk neutral.
a) What will the consumers’ willingness to pay be for an ALFA-watch under these conditions?
Based on the analysis, the management at ALFA are not particularly worried about copy-watches right now.
b) Explain how the management might justify that the cope-watches do not constitute a major problem.
In the analysis-department they are more worried. The problem of copy-products will undoubtedly be increasing. Call the proportion of real ALFA-watches q and ALFA-copy-watches for 1 - q.
c) Express using q, what a consumer will pay for a watch in the market for ALFA-watches and calculate the share that the copy-products must have of the market before ALFA find it necessary to review its pricing of their watches.