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Daisy Medhora – AREC 323

October 10, 2017

Assignment 2 (individual)
Strategic Positioning
1. (20 points) When products are weakly differentiated, should firms pursue cost leadership
or benefit leadership (5 points)? Use the linear town graphical model to answer this
question (10 points). Please provide an example of a product for which you would pursue
cost leadership (5 points).

When products are weakly differentiated firms should pursue cost leadership. Using the linear
town graphical model products that are weakly differentiated are more vertical, meaning that
their utility curve in the graph is very flat (low degree of horizontal differentiation). Since weakly
differentiated products have close substitutes it is harder to modify the cost of the item, any
little shift in price would drive consumers to the other substitute. An example of a product
where you would use cost leadership instead of benefit leadership would be pen. Pens can be
sourced from cheap domestic suppliers or even low wage foreign markets, allowing the
company to sell pens efficiently at a large scale.

2. (20 points) When products are strongly differentiated, should firms pursue cost leadership
or benefit leadership (5 points)? Use the linear town graphical model to answer this
question (10 points). Please provide an example of a product for which you would pursue
benefit leadership (5 points).

When products are strongly differentiated, firms should purse benefit leadership. Using the
linear town graphical model products that are strongly differentiated have a high degree of
horizontal differentiation, meaning that their utility curve is very steep. Since strongly
differentiated products do not have close substitutes it is easier to modify the price of this item.
Therefor choosing benefit leadership will allow the firm to increase the prince of an item but not
decrease the quantity of sales. An example of products where a firm would choose benefit
leadership over cost leadership would be

3. (30 points) Elasticity of demand is a measure used by economists to shows how much
demand for a product changes as price of that product changes by 1 percent. For example,
if elasticity of demand for a product is -2, then a 1 percent increase in price of a product
results in a 2 percent decrease in demand for that product. If elasticity is smaller than -1
(or absolute value is larger than 1) we say demand for the product is elastic. If elasticity
is between 0 and -1 (or absolute value is between 0 and 1) we say demand for the product
is inelastic. Demand for many small businesses’ products (e.g. food products) is known
to be very elastic (i.e. elasticity is smaller than -1).

a. Assume you have a meat processing plant and elasticity of demand for your sausage
products is approximately -2. Would you follow a cost leadership or a benefit leadership
for your sausage products? Why (10 points)?

I would follow a cost leadership for sausage products since the elasticity of demand is -2,
meaning that the demand is elastic. When the demand is elastic or absolute value is greater
than 1, the quantity of sausages would move proportionately more than the price, so the
demand is very responsive because there are many substitutes for sausages.
Daisy Medhora – AREC 323
October 10, 2017

b. You have recently created a new type of healthy beef jerky that does not have many
close substitutes. Elasticity of demand for this product is approximately
-0.5. Would you follow a cost leadership or a benefit leadership for your sausage
products (10 points)? Why (10 points)?

I would follow a benefit leadership for this healthy beef jerky since there are not many close
substitutes. Since the demand for this jerky is -0.5 the demand for this product is inelastic, so
the quantity would move proportionately less than the price. This would mean that the demand
is not very responsive to changes in price.

c. Why do you think demand for sausage products is more elastic that demand for healthy
beef jerky (10 points)?

The demand for sausage products is more elastic than the demand for healthy beef jerky
because there are close substitutes for sausages. If one company were to raise the price of its
sausage, consumers would go for cheaper closer substitutes, therefore a small increase in price
would result in a huge drop in quantity demanded because elasticity for this product is high.

4. (20 points) Many graduated of this faculty are hired by large grain companies. Imagine
you have been hired by the sales department of a grain company. This company exports
Canadian lentils to India, Middle East, and some other countries. You have been asked to
write a short report on how this company can practice price discrimination in order to
obtain a competitive advantage.
a. (10 points) Mention at least 2 different ways the company can practice 2nd degree price
discrimination?

2nd degree price differentiation is when larger quantities are sold at a lower unit price. One way
that this company practices 2nd degree differentiation is by shipping off lentils in a bulk amount
for a lower price to similar consumers. A second way of practicing 2nd degree price
discrimination would be to display a loyalty card or membership which allows these frequent
buyers of lentils to obtain lentils at discounted rates on future purchases.

b. (10 points) Mention at least 2 different ways the company can practice 3rd degree price
discrimination. (hint: assume India is the largest importer of Canadian lentils and think
about WHEN 3rd degree price discrimination can be practiced).

3rd degree price differentiation can be used when the consumers’ attributes vary the price such
as their location, income, etc. The company can practice 3rd degree price differentiation if they
were to offer a “group” discount to the countries included in the Middle East but offer a
different, higher price to India since they are the largest importer of Canadian lentils. Another
way the company can practice 3rd degree price discrimination would be to offer cheaper prices
for lentils during seasonal growth period versus when lentils are not primality grown, the
company would still be exporting lentils when it not lentil season because people are to not be
going to stop eating lentils since they are a staple food for many.
Daisy Medhora – AREC 323
October 10, 2017

5. (10 points) In class, we have talked about Santa Fe Food Company’s Clean Cherry Sause
products several times. What do you think the basis of competitive advantage for this
company is? Do you think they pursue a cost leadership or a benefit leadership?

The comparative advantage to Santa Fe Food Company’s Clean Cherry Sauce is that the sauce is
produced in accordance with a program that ensures that the hot sauce is organic and is quality
assured. Santa Fe Food Company can pursue a benefit leadership because of the quality of this
hot sauce, the company uses the best ingredients (ex: farm fresh cherries, pungent peppers,
etc.) to create a top of the line hot sauce. There are few hot sauces in the market that are
organically produced, which help support both consumer health and the Earth at the same time,
therefore Santa Fe Food Company has the luxury to charge their consumers higher prices for a
better quality hot sauce.