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Cruise Companies and Others Swim Against the Economic Tide
Subject Returning to equilibrium
Topic Equilibrium
Key Words Economy, market share, incentives, price, capacity, innovate
News Story

As the economy softens, consumer products companies are seeking to hang on their market share through a number of strategies. In the computer industry, as well as shading prices, Dell is giving free upgrades, shipping, and Internet service to on-line customers. Some models come with a printer, a scanner, or a digital camera. Automakers are giving more incentives. On average, in March, incentive spending was $2,570 per care, up 42 percent from a year earlier.

Some household products are coming down in price. Clorox reduced the prices of select cleaning goods, such as disinfecting wipes and Formula 409, by 10 percent. Procter & Gamble backed off raising the price of Bounty paper towels by 9 percent, and instead increased the price by 4.5 percent.

Cruise operators are also reducing their prices to try and fill their expanding fleets. A 7-day Caribbean cruise in January cost only $730 for a standard cabin, compared to $1,124 a year before. Likewise, the hotel industry has been increasing capacity, and is facing falling occupancy rates. Consequently, room rates are expected to rise only 3.8 percent, compared with 4.9 percent last year. In addition, fewer new rooms will be built this year than last year.

To avoid dependence on competing only on price, companies need to innovate. For example, the number of disposable cameras sold increased substantially in 2000, despite the onset of the slowdown.

(Updated June 1, 2001)

Questions
1.

Draw a supply and demand diagram for household cleaning products. Mark the initial equilibrium price and quantity.
a) Which determinant of supply or demand is most directly affected by the weakening economy?
b) Illustrate the implications of the slowing economy, assuming that the price is initially constant. What kind of disequilibrium results?
c) Why has Clorox reacted as it has?

2. Depict the same initial supply and demand disequilibrium, but this time in the computer industry.
a) Which determinant of supply or demand is affected most directly by the provision of free accessories when a computer is purchased?
b) Show how the disequilibrium is affected by the free accessories.
3. Draw a supply and demand diagram for the hotel industry, showing a disequilibrium between the supply of hotel rooms, both actual and planned, and the demand for hotel rooms.
a) Show the effect of decisions to reduce expansion plans. Explain what you have drawn.
b) A change in which determinant of supply or demand most directly caused the decline in the number of hotel rooms?
4. a) In economic terms, what are the three ways in which companies can restore equilibrium? Refer to your responses to the first three questions.
b) Why might innovative products be a better approach for companies?
Source Lorrie Grant, "Soft economy prompts price reductions," USA Today, March 29, 2001.

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