Suppose the owner of Haywood Ceramics needs to raise prices to stay in business, but is concerned that raising prices would result in a death spiral. To avoid a decline in sales, the owner is considering sending letters to her customers explaining why the price increase is necessary. The letter would inform customers about the cost increases that necessitated the price increase, explain what the company is doing to keep costs as low as possible, and allow customers to place orders for a given time period at the current price.

REQUIRED

A. Describe the death spiral in your own words.

B. Explain why the owner cannot be sure how customers will respond to a price increase.

C. Suppose the owner decides to send letters to her customers. From a customer’s point of view, discuss possible pros and cons of this strategy.

D. Would you recommend that the owner send letters to her customers? Why or why not?