GROUP ASSIGNMENT COVER SHEET

STUDENT DETAILS

Student name: Nguyễn Trương Bảo Ngọc Student ID number: 22003024

Student name: Võ Nhựt Tân Student ID number: 22002211

Student name: Nguyễn Hoàng Nhi Student ID number: 22003086

Student name: Nguyễn Thị Châu Như Student ID number: 22002976

Student name: Đặng Quỳnh Như Student ID number: 22003243

Student name: Nguyễn Quang Tấn Phúc Student ID number: 22002997

UNIT AND TUTORIAL DETAILS

Unit name: Managerial Economics Unit number: ECO201

Tutorial/Lecture: Class day and time: Wed 8 A.M - 11:15 A.M
Lecturer or Tutor name: Dr. Pham Dinh Long
ASSIGNMENT DETAILS

Title: Simulation’s Reflective Report 3 - Group 8

Length: 1536 words Due date: 21/11/2023 Date submitted: 21/11/2023

DECLARATION

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from the Lecturer / Tutor / Unit Coordinator for this unit.
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plagiarism checking).

Student’s signature: Ngọc

Student’s signature: Tân
Student’s signature: Nhi
Student’s signature: Như
Student’s signature: Như
Student’s signature: Phúc

Note: An examiner or lecturer / tutor has the right to not mark this assignment if the above declaration has not
been signed.
 ME-T12324PWB-1_Group 8_Reflective Report 2

TABLE OF CONTENT

INTRODUCTION..................................................................................................................2
BODY...................................................................................................................................... 3
MEMO 2.............................................................................................................................3
MEMO 7.............................................................................................................................5
CONCLUSION.......................................................................................................................7

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 ME-T12324PWB-1_Group 8_Reflective Report 2

INTRODUCTION
In a landscape of intensified competition, businesses must strategically set prices to align with
market dynamics, ensuring competitiveness and responsiveness to industry players' pricing actions.

Time Warner Cable, originating from the establishment of American Television and
Communications (ATC) in 1968, holds a consequential position in the annals of the media and
communications industry. Its trajectory encompasses pivotal events, including the merger with Time
Inc. and Warner Communications in the 1990s, followed by the landmark union with AOL in 2000.
Despite facing challenges and strategic realignments, the company underwent significant
transformations, culminating in its separation from Time Warner, Inc. in 2009. This strategic
decision marked the inception of a new phase for Time Warner Cable, particularly emphasizing its
role in the domain of Internet and communications.

Google, founded in 1998 by Larry Page and Sergey Brin, is a global technology powerhouse known
for its iconic search engine and a wide array of innovative products and services. From cloud
computing to software applications, Google has profoundly impacted the digital landscape,
becoming a symbol of technological innovation and influence.

Each memo serves distinct objectives, focusing on analyzing market competition and formulating
effective pricing strategies to navigate challenges presented by external entrants and changing
market dynamics. Specifically,
● Memo 2 is to address the business challenge of increased competition in the Austin market,
mainly due to Google Fiber's entry. The main goal is to carefully evaluate how this heightened
competition affects the company's pricing strategy, cost structure, and potential decisions
regarding market exit.
● Memo 7 is related to strategic pricing decisions in the Central State region, exploring the
choice between maintaining the current premium over the competitor's price or aligning with
their rate. The memo will weigh market share trends, the competitor's pricing strategy, and cost
considerations.

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BODY

MEMO 2
To: Pricing Manager, Austin
From: Vice President, Marketing
Re: Google Fiber

As you are aware, Google has been entering select markets with its Google Fiber service that
competes directly with our high-speed data and video services. Even though its market
penetration has been moderate, Google has deep pockets and excellent brand awareness. As a
result, we are paying close attention to markets that it is entering.

Within the last year, we completed our own fiber upgrade in the area at a cost of a little over $550
million. We are able to provide our high-speed data and video, and have a large number of
bundled customers for our products. Unfortunately, many of them have been with us for a while
and are no longer under any contract to remain with us. With Google’s entry (along with existing
competition), we may need to reduce our prices. The Austin service area for our services includes
340,000 households. Currently, in neighborhoods where Google competes, we provide bundled
services that average $120 per household per month.

In addition to monthly costs associated with the $550 million (which is being amortized over 15
years at 6.0 percent), agreements with program providers stipulate that we pay them $41.50 per
subscriber per month. In addition, we have maintenance, service, and billing costs of $9.20 per
subscriber.

I am concerned that increased competition will lead to a price war, and that prices may get to
unprofitable levels. If things turn really bad, we may need an exit strategy from this market. How
low should we be willing to go with our prices before it makes sense to exit the Austin market?

● Fiber upgrade cost of $550 million ⇒ Setup cost (one-time cost) ⇒ This cost is constant
regardless of the number of subscribers and is thus classified as a fixed cost.
● Payments to program providers = $41.50 per subscriber/month & Maintenance, service, and
billing costs = $9.20/subscriber. ⇒ These costs fluctuate with the number of subscribers; as the
number of subscribers grows, so does the cost; as the number of subscribers reduces, so does
the cost. As a result, these costs are categorised as variable.

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 ME-T12324PWB-1_Group 8_Reflective Report 2

As per the shutdown rule, the firm should shut down in the short run (and exit the market in the
long run) when the price falls below the average variable cost.

Average variable cost = Payments to program providers per subscriber + Maintenance, service,
and billing costs per subscriber
Average variable cost = $41.50 + $9.20
Average variable cost = $50.70

● If the price goes below $50.70, the firm should close down promptly to minimise losses and
exit the market in the long run.

⇒ The firm should be willing to decrease its pricing to $50.70, but if the price falls below $50.70,
the firm will be unable to cover its fixed costs as well as some of its variable costs, and thus, in
order to minimise losses, the firm must shut down in the short run and exit the market in the long
run.

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 ME-T12324PWB-1_Group 8_Reflective Report 2

MEMO 7
To: Pricing Manager, Central State Region
From: Vice President, Marketing
Re: Strategic Pricing Decision

Our only competitor in the Central State region currently provides bundled services at $79.95. We
are currently charging a 10 percent premium over its price, but there are rumors that it is
contemplating a 10 percent price increase to bring its price in line with ours. We don’t know its
cost structure, so we don’t know whether its price increase is driven by rising costs or a strategic
move to gain margin.

Historically, when we both charge the same price, our market share is about 65 percent. When we
charge a 10 percent premium over its price, our market share declines to about 60 percent. It
appears that in those instances when it charges a 10 percent higher price than us, our market share
is about 70 percent.

Please provide a recommendation regarding whether we should maintain our current price or
reduce our price to $79.95. Please factor into your recommendation that we pay programming
fees that amount to $49.50 per subscriber. In addition, maintenance, service, and billing costs are
about $6.50 per subscriber. At present, there are 110,000 households in the relevant market.

The company should not lower the price of its services; instead, it should charge a 10% premium
over its competitor's price of $79.95.

Situation 1.
● If the business charge a 10% premium price
Competitor’s price is $79.95
→ Company’s current price = $79.95 + (10% × $79.95) = $87.945
● Company’s total cost = Programming fees + Maintenance, service and billing cost = $49.50 +
$6.50 = $56
● In this situation, market share will be 60% since we charge a 10% premium price.
There are 110,000 households in the relevant market
→ 60% × 110,000 = 66,000 households
● Profit per subscriber = Current price - Total cost = $87.945 - $56 = $31.945
● Total profit = 66,000 × $31.945 = $2,108,370

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Situation 2.
● If the businesses charge the same price
Competitor’s price = Company’s current price is $79.95
● Company’s total cost = Programming fees + Maintenance, service and billing cost = $49.50 +
$6.50 = $56
● In this situation, market share will be 65% if we both charge a same price.
There are 110,000 households in the relevant market
→ 65% × 110,000 = 71,500 households
● Profit per subscriber = Current price - Total cost = $79.95 - $56 = $23.95
● Overall profit = 71,500 × $23.95 = $1,712,425

Therefore, as 2,108,370 > 1,712,425, it is suggested for the company not to reduce its price and
should charge premium price over its competitors ($87.945)

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CONCLUSION
Memo 2 and 7 involve pricing decisions in the face of competition. In both cases, the company is
considering whether to lower its prices to align with competitors or maintain a premium price.

● Memo 2 indicated that The Vice President of Marketing is concerned about the competition
posed by Google Fiber in their market. To be more specific, The fiber upgrade cost of $550
million is fixed, while The average variable cost, calculated as $50.70, includes the costs of
program providers and maintenance. If the price falls below $50.70, the firm will be unable to
cover its fixed costs and some variable costs.

Therefore, the firm should be willing to decrease its pricing to $50.70, but if the price falls
below that threshold, it should shut down in the short run to minimise losses and exit the
market in the long run.

● Memo 7 showed that in Situation 1, where the company charges a 10% premium, the
company's current price is $87.945. With a market share of 60% (66,000 households out of
110,000), the profit per subscriber is $31.945, resulting in a total profit of $2,108,370.
However, in Situation 2, where both companies charge the same price, the market share for the
company is 65% (71,500 households out of 110,000). The profit per subscriber is $23.95,
leading to an overall profit of $1,712,425.

Comparing the two situations, the company's total profit is higher when it charges a premium
price ($2,108,370) compared to charging the same price as the competitor ($1,712,425).
Therefore, it is suggested that the company should not reduce its price and continue to charge a
premium price over its competitors ($87.945).