Demand Elasticity And Pricing Strategy For Big Time Entertai

Demand Elasticity and Pricing Strategy for Big Time Entertainment

In this week's discussion, I assume the role of CEO of Big Time Entertainment, a nationwide company providing movies, concerts, arcades, and other in-person entertainment venues. The COVID-19 pandemic and associated restrictions have significantly impacted our operations, imposed additional safety costs, and introduced economic uncertainties. We are currently experiencing a cost-push inflationary environment, which raises the question of how much of these increased costs we should pass on to our customers through higher prices. An understanding of the demand elasticity for our services is essential to inform this decision.

Assessment of Demand Elasticity

Our company's demand for entertainment services exhibits a price elasticity of demand of 1.6, which classifies it as relatively elastic. Elastic demand indicates that consumers are quite responsive to price changes; a small percentage change in price leads to a proportionally larger change in the quantity demanded. This is typical for entertainment services, especially in a competitive environment where alternatives such as online gaming and streaming are readily available, and consumers' willingness to attend in-person events is sensitive to price and safety concerns.

Forecast of Quantity Demanded Adjustment

Given the elasticity of 1.6, we can analyze the impact of passing on a 10% increase in costs to our customers and forecast the corresponding change in demand. The formula for percentage change in quantity demanded based on price elasticity of demand (E) is:

Percentage change in quantity demanded = Elasticity × Percentage change in price

Applying this formula:

Percentage change in demand = 1.6 × 10% = 16%

Since demand is elastic (greater than 1), increasing prices by 10% will result in approximately a 16% decrease in the quantity demanded. This demonstrates consumers' sensitivity; a significant drop in attendance is expected if we pass the full cost increase onto them.

Pricing Strategy Considerations

Given this analysis, passing on the entire 10% increase in costs would likely lead to a substantial decline in attendance—around 16%. This drop could reduce overall revenue and adversely impact our profitability, especially if we operate at narrow profit margins. Therefore, as CEO, I would consider whether to absorb some of the cost increases or implement selective pricing strategies. For instance, we could introduce tiered pricing, offering premium experiences with higher prices for added value while maintaining basic ticket prices for cost-conscious consumers. Alternatively, we could absorb part of the cost increase temporarily, aiming to retain customer loyalty and market share during uncertain times.

Conclusion

Overall, because demand for Big Time Entertainment's services is elastic with a coefficient of 1.6, increasing prices by 10% would lead to a disproportionately larger decrease in demand (approximately 16%). Consequently, it would be strategically unwise to pass on the entire cost increase to consumers. Instead, a balanced approach that moderates price increases while focusing on cost efficiency and value addition is preferable. Such a strategy would help preserve demand, sustain customer satisfaction, and maintain long-term profitability amidst ongoing inflationary pressures.

References

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