A product that represents a clear technological advance over competing products can generally command a high price. Because technological advances tend to be quickly surpassed and companies want to make large profits while they still can, many companies charge the maximum possible price for such a product. But large profits on the new product will give competitors a strong incentive to quickly match the new product's capabilities. Consequently, the strategy to maximize overall profit from a new product is to charge less than the greatest possible price.

Question

Business

Deanna Romero

15 August, 13:55

A product that represents a clear technological advance over competing products can generally command a high price. Because technological advances tend to be quickly surpassed and companies want to make large profits while they still can, many companies charge the maximum possible price for such a product. But large profits on the new product will give competitors a strong incentive to quickly match the new product's capabilities. Consequently, the strategy to maximize overall profit from a new product is to charge less than the greatest possible price.

+5

Answers (1)

Know the Answer?

Thor · Answer 1

The first is a consideration raised to explain the appeal of a certain strategy; the second is a consideration raised to call into question the wisdom of adopting that strategy

Explanation:

The strategy to increase overall profits from the new product is to charge less than the largest possible price.

Let's break down the logic now - and it's going to be long and complicated. Ignore the boldface for now, because if we don't understand how logic works, we can have a hard time understanding the role of each component:

With advanced technology, a new product can usually be sold at a higher price.

Most companies charge as much as they can because (a) advanced technology quickly outperforms them and (b) companies want to make as big a profit as they can. Knowing that any technical advantage you have will soon outweigh the cost as much as you can to maximize your immediate profit. When competitors see a company making big profits on a new product, they want to quickly match the technology of that product. By maximizing your own profits, you are giving competitive companies an incentive to quickly "catch up" and create products with similar capabilities. Instead, if you don't charge as much as you can and increase your immediate profits, competitors are less likely to match the product. Without great high prices, your company has more time to make profits than a technologically advanced product. Therefore, according to the author, if a company wants to maximize overall profits from a new product, it must charge less than the highest possible price.