In the market for one of its products, MD and its two major competitors (CN and KL)

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Question:

In the market for one of its products, MD and its two major competitors (CN and KL) together account for 95% of total sales.

The quality of MD’s products is viewed by customers as being somewhat better than that of its competitors and therefore at similar prices it has an advantage.

During the past year, however, when MD raised its price to £1.2 per litre, competitors kept their prices at f1.0 per litre and MD’s sales declined even though the total market grew in volume.

MD is now considering whether to retain or reduce its price for the coming year. Its expectations about its likely volume at various prices charged by itself and its competitors are as follows:


MID	CN	KL	MD’s expected sales
(£)	(£)	(£)	million litres
1.2	1.2	1.2	2.7
1.2	1.2	1.1	2.3
1.2	1.2	1.0	2.2
1.2	1.1	1.1	2.4
1.2	1.1	1.0	2.2
1.2	1.1	1.0	2.1
1.1	1.1	1.1	2.8
1.1	1.0	1.0	2.4
1.1	1.0	1.0	2.3
1.0	1.0	1.0	2.9

Experience has shown that CN tends to react to MD’s price level and KL tends to react to CN’s price level. MD therefore assesses the following

8.6 Expected value, maxim in and regret probabilities:

If MD’s price	there is a	that CN’s price
per litre is	probability of	per litre will be
1.2	0.2	1.2
	0.4	1.1
	0.4	1.0
	1.0
1.1	0.3	1.1
	0.7	1.0
	1.0
1.0	1.0	1.0
If CN’s price	there is a	that ICUs price
per litre is	probability of	per litre will be
(£)		(£)
1.2	0.1	1.2
	0.6	1.1
	0.3	1.0
	1.0
1.1	0.3	1.1
	0.7	1.0
	1.0
1.0	1.0	1.0

Costs per litre of the product are as follows:

Direct wages	£0.24
Direct materials	£0.12
DepartMental expenses:
Indirect wages,	16 2/3 % of
maintenance	direct wages
and supplies
Supervision and depreciation	£540 000 per annum
General works expenses (allocated)	16 2/3 % of prime cost
Selling and administration	50% of manufacturing cost
expenses (allocated)

You are required to state whether, on the basis of the data given above, it would be most advantageous for MD to fix its price per litre for the coming year at £1.2, £1.1 or £1.0.