Question

Complete the following table by matching each of the scenarios to the concept of resale price maintenance, predatory pricing, or tying.ScenarioResale Price MaintenancePredatory PricingTyingCitron is a firm that manufactures electric scooters. Suppose Citron sells its electric scooters to online retailers for $960 each and requires those online retailers to charge at least $930 to shoppers for each electric scooter. Warm Winds is the only firm producing air fryers. It costs $420 to produce one air fryer, and Warm Winds sells each air fryer for $950. After Sirocco, a new firm with the same costs as Warm Winds, enters the market for air fryers, Warm Winds starts selling its air fryers for a price of $330. Rightround sells a wide variety of records to retail record stores. rightround recently pressed two new records: a popular pop punk album and a much less popular smooth jazz album. rightround requires record stores to order 15 copies of the smooth jazz album for every 120 copies of the pop punk album bought.True or False: The only reason for Citron to require retailers to sell electric scooters at a certain price is to reduce competition and extend its market power to the retail market. Therefore, this practice is always economically inefficient.TrueFalse

Answer 1

Resale price maintenance, predatory pricing, and tying are different pricing practices used by firms. Citron's requirement for minimum retail prices is resale price maintenance, while Warm Winds' price drop to drive out competition is predatory pricing. Rightround's requirement for purchasing certain albums along with others is tying. The statement about Citron's practice being economically inefficient is false.

Step-by-step explanation:

The first scenario of Citron requiring online retailers to charge at least $930 for their electric scooters is an example of resale price maintenance. Resale price maintenance is when a manufacturer sets a minimum price that retailers must charge consumers for its products. This practice allows the manufacturer to maintain control over the retail price and prevent price competition among retailers.

The second scenario of Warm Winds dropping its air fryer price to $330 after a new competitor enters the market is an example of predatory pricing. Predatory pricing occurs when a firm intentionally sets low prices to eliminate competition and drive rivals out of the market. In this case, Warm Winds lowers its prices to deter Sirocco from gaining market share.

The third scenario of rightround requiring record stores to order 15 copies of the less popular smooth jazz album for every 120 copies of the popular pop punk album is an example of tying. Tying is when a firm requires customers to purchase one product (the tied product) in order to purchase another product (the desired product). In this case, rightround is tying the sales of the smooth jazz album to the sales of the popular pop punk album.

Regarding the statement about Citron requiring retailers to sell electric scooters at a certain price, the statement is False. While the practice of resale price maintenance can have anti-competitive effects, it is not always economically inefficient. There may be legitimate reasons for a manufacturer to set minimum prices, such as maintaining product quality or providing after-sales services.

Answer 2

Citron's requirement for electric scooters falls under resale price maintenance, Warm Winds' pricing strategy after Sirocco's entry is predatory pricing, and Rightround's sales condition is tying. The statement that Citron's price requirement is always economically inefficient and only to reduce competition is false.

Step-by-step explanation:

When matching each scenario to the concept of resale price maintenance, predatory pricing, or tying, we find:

• Citron's requirement for online retailers to charge at least $930 for each electric scooter is an example of resale price maintenance.
• Warm Winds's decision to sell air fryers below cost at $330 after Sirocco enters the market, with the intent of driving Sirocco out, is an example of predatory pricing.
• Rightround requiring record stores to order a certain number of smooth jazz albums for every pop punk album they buy is an example of tying.

Regarding the true/false statement, it is False. The practice of Citron requiring retailers to sell electric scooters at a minimum price could have reasons other than reducing competition, such as maintaining a premium brand image, ensuring service quality, or avoiding price wars that could damage the industry. Therefore, it is not always economically inefficient.