Price Setting Decisions

Goals:

• Determine price setting process for monopolistic and monopolistically competitive firms
• Understand the role of patents as a barrier to entry
• Consider the role of information asymmetry in exchanges
• Predict the outcome of surpluses for business

Relevant Clips:

• Marketing the Sauce
• Peppers!
• The House That Stolen Sauce Built
• The Sauce Maven

Overview/Description:

Getting students to think about the role of firms in the production process can often be tough because most have never been on the production side of the decision process and instead have spent much of their time on the consumption side. There are a series of clips detailing the product life of Gloria’s secret family sauce.

Discussion Questions:

When Gloria first starts out to recreate her family recipe, she doesn’t go through the formal process of patenting her product. As a result, a local competitor has copied her sauce and is selling it under the Auntie Alice brand. After watching Marketing the Sauce, consider the role of product differentiation in monopolistically competitive markets. Gloria only has one sauce while her competition sells a wide variety. While it may be more efficient (for her) to sell only one product, is it the right decision? How does price compare to average total cost for a monopolistically competitive firm? Have students draw a graph of the long-run monopolistically competitive outcome to compare.

In the follow-up scene, The House That Stolen Sauce Built, we learn that Auntie Alice has actually stolen Gloria’s recipe and patented it herself. Patents create a short-term barrier to entry and give the firm monopoly power over a product. Have students draw a short-run monopoly graph and consider the differences between monopolistically competitive markets. Is the profit-maximizing decision between monopolies and monopolistically competitive firms different? What about the pricing decision?

Finally, Gloria gets tired of being in the sauce business and Haley can help. Haley’s company, NERP, is looking for new product lines and she recommends Gloria’s company. At first it appears Gloria doesn’t want to sell the business, but after the meeting Gloria reveals to Jay that the sauce business is a bust and there are warehouses full of sauce. What do sellers usually do when they have a surplus? Are Gloria’s past actions consistent with traditional economic principles of rationality? How important is the information asymmetry in this negotiation process?