CASE 2, Managerial Economics, YANGON_ MBA_Batch 7,UTCC-UMFCCI

Lesser Antilles Lines: The Island of San Humberto

Introduction
The case analyzes tactical and strategic decisions in a context of firm competition
in the sea transport industry. It provides an excellent opportunity to put into
practice some of the concepts and tools we have analyzed along the course. In
particular the case is related to individual decisions of consumers (lecture 5),
demand elasticity (lecture 6), market structures (lectures 11, 12 and 13), Game
Theory (lecture 13) as well as with advanced pricing decisions (lecture 14). I
recommend that groups will first review the contents of the slides before
answering the questions.
Instructions

Each of the groups must answer the questions in this SAME sheet (Word
document, please do not send me pdf or other formats).

Please name your file as UTCC_UMFCCI_CASE2_GROUP_X (where X is the

number of your group). The groups need to BE THE SAME as for case 1.

The answer to each of the questions must be clear and brief. I suggest the
maximum length to answer each of the questions but it can slighty be
changed taking into account that the TOTAL LENGTH CAN NOT EXCEED
THESE TWO PAGES. Please use the same font style and size as
here(Cambria, 12 points).

Each of the groups must submit the answers to my email

(nacho.olmeda@gmail.com) NOT LATER than SUNDAY 31ST AUGUST 2016.
Please indicate in the subject: UTCC_UMFCCI_CASE2_GROUP_X.

As in the discussion of the first case, I will take into account: i) accuracy and
brevity, ii) originality, iii) domain of the technical tools.

1. What is the case about? (10 lines)

This case is about two shipping firms, Lesser Antilles Lines (LAL) and Kronos
Lines (KL), in the middle of a price war over the market for containerized
shipping to and from the Caribbean island of San Huberto. This situation
entails a duopoly situation in which the two shipping firms are the only firms
offering a U.S San Huberto connection. Initially a monopoly market
dominated by KL, LAL entered the San Huberto market in 1980 to capitalize on
the islands shallow-draft port for which only KL and LALs vessels were
equipped to operate. However, due to the customers having inelastic and
time-sensitive demand particularly in the Caribbean regin, LAL has been
finding it difficult to set strategic pricing decisions. James Vaughan, who is in
his second year of MBA program, has been assigned to survey and evaluate
the pricing strategy adopted by LAL in order to improve LALs earning position
Prof. Ignacio Olmeda
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CASE 2, Managerial Economics, YANGON_ MBA_Batch 7,UTCC-UMFCCI

and market share in either San Huberto alone, or across 8 new potential
markets in the regin.
2. Related to LAL, what should be the main objective of Vaughan? (10 lines)
Vaughan should aim to implement a competitive strategy that will increase
market share of LAL in the region of small Caribbean islands. One such way to
do so is for Vaughan to suggest a change in the agent used in San Huberto, in
order to combat against racial and language barrier faced by LALs current
agent Montagu. In addition, as the price elasticity of demand for the Caribbean
liner industry is perfectly inelastic, low cost price matching between LAL and
KL should not be suggested, as a dramatic decline in price of shipping services
will have almost no effect on the amount of services demanded. Hence,
Vaughn shouldnt implement his stated objective to run KL out of the market
as this will not do any good for LAL in the long run due to the perfect price
inelasticity of demand. Instead, he should suggest LAL to look to implement
bypass style of attack on KLs market share by focusing on niche markets of
other untapped small Caribbean islands.
3. Explain the role that the elasticity of the demand plays in the case. (10 lines)
The price elasticity of demand in the case affects the ability of LAL to set its
pricing strategy. As it is stated that the price elasticity of demand is perfectly
inelastic, this means the demand is graphed as a vertical line, implying a
marginal or no change in quantity demanded even when there is a major
change in price. What this means for LAL is that charging low prices in order to
drive KL out of the market will only do harm to LAL in the long run as the
perfect price inelasticity will only contribute to the accumulation of
contribution losses for LAL. This also implies that demand for shipping services
is high around the region, and the fact that mutual understanding needs to be
established between competing firms in order to achieve contribution
maximization.
4. Regarding market power, which is the best description for LAL (Monopoly,
Duopoly/Oligopoly, Perfect Competition) (10 lines)
For LAL, it can be regarded as a duopoly. There is mutual interdependence in
pricing decision taken by LAL and KL. Any pricing decisions taken by LAL will
affect the trade of KL and hence will result in countermoves. This can be seen
as highlighted by the case where KL was able to meet every one of LALs price
changes shortly after the announcement.
5. In terms of pricing, does the predatory strategy of KL fit into any of the
categories we studied? Why or why not? (10 lines)
It does not fit into any of the categories we studied, because predatory pricing
by definition refers to setting prices at a very low price in order to drive
competition out of the market. The categories we have studied include uniform
pricing, price discrimination, bundling pricing, and cost-plus pricing. Predatory
pricing is a way to crate barrier of entry for new market entrants, which is
usually regarded as ilegal under anti-competition laws in most countries.

Prof. Ignacio Olmeda

CASE 2, Managerial Economics, YANGON_ MBA_Batch 7,UTCC-UMFCCI

6. Can you suggest any tool/concept that we studied in Game Theory (e.g. Nash
equilibrium, Best Response Functions) that could be useful to find a solution to
the pricing problem? how? (15 lines)
The concept of Best Response Function can be applied to help find a solution
to the pricing problem. Since we know the applied market share of LAL and KL,
we can calculate the best response for LAL given a certain price set by KL,
from the matrix constructed by Vaughn. As per the contribution matrix, the
equilibrium price is at 1,400 for KL and 1,300 for LAL as these prices give the
mximum payoff for both firms. Hence LAL can unilaterally set the price at
1,300, to induce KL to realize that setting KLs price at 1,400 would generate
the mximum payoff, given that no firm has the incentive to cheat.

Prof. Ignacio Olmeda