Question

decision point: choosing your strategy
you meet a friend of yours for lunch. he is a supplier of coffee machines. while talking business, you mention to him that youve decided to use the principles of supply and demand to determine the market price for the coffee you plan to sell at your kiosk on campus.
he suggests that youre making a lot of work for yourself, and you should just set your price based on the prices charged by your competitors. however, youre apprehensive about using that approach.
which would be the best argument in favor of your decision to use the principles of supply and demand?
select an option from the choices below and click submit.

• the price your competitors charge is based on the costs that they incur and the market in which they operate, and these may be different from yours.
• using the principles of supply and demand, data is less expensive than spending time and resources to learn about the prices charged by your competitors.
• the market price that you determine by using the principles of supply and demand will be accurate and will ensure a high market share.

Explanation:

To determine the best argument for using supply - demand principles, we analyze each option:

• Option 1: Competitors' prices depend on their unique costs and market conditions (like their target customers, location - specific costs, etc.). Your business (campus kiosk) has different cost structures (e.g., maybe lower rent on campus, different coffee bean suppliers) and operates in a different market (campus - specific demand from students/staff) than competitors. So using competitors' prices directly may not fit your situation, making supply - demand a better approach as it considers your own supply (production, inventory) and demand (campus customer demand).
• Option 2: Using supply - demand data is not necessarily less expensive in terms of time/resources than researching competitors' prices. In fact, researching competitors' prices can be relatively straightforward (e.g., just asking or checking menus), while supply - demand analysis may require collecting data on customer demand at different prices, your production costs, etc. So this option is incorrect.
• Option 3: Using supply - demand to set price doesn't guarantee high market share. Market share depends on many factors like quality, branding, location convenience, and competition. Also, the "accuracy" claim is too strong as supply - demand analysis gives an equilibrium price but doesn't account for all market dynamics that affect share. So this option is incorrect.

Answer:

The price your competitors charge is based on the costs that they incur and the market in which they operate, and these may be different from yours.