Please submit your answers electronically by uploading on Canvas by 1 PM on April 28 (Friday), 2023.

1.    Suppose that you are the owner of a brand of energy drink, called ACTIVE (which competes with brands such as Red Bull, Monster etc.). Suppose that the price elasticity of ACTIVE is ‐2.5 (as revealed by the analysis of historical data on sales and prices of ACTIVE over the past 2 years).

b.    Assume that ACTIVE’s profit margin is equal to the minimum profit margin calculated under question 1 (a). What is the maximum percentage price cut that you can offer on ACTIVE without decreasing your profit?

d.    Suppose that you introduce a second brand of energy drink, called HIGH ENERGY. Now, you own a portfolio of two brands, ACTIVE and HIGH ENERGY. In this scenario, will you find it optimal to maintain the  price of ACTIVE at the optimal  price  calculated  under question 1 (c), or increase it or decrease it? Why? Explain the rationale for your answer (no calculations are necessary).

2.    What is the rationale for brand managers to offer trade deals? Clearly explain the difference between an off‐invoice trade deal and a scan‐back trade deal. Why does the retailer prefer the off‐invoice trade deal? How would a brand manager offer a suitably redesigned scan‐back trade deal in order to make the retailer accept it (and not demand an off‐invoice trade deal)? When going from an off‐invoice trade deal to the redesigned scan‐back trade deal, the retailer’s profit does not decrease, however, the brand manager’s profit still increases. Why? In other words, how does the  redesigned scan‐back trade deal yield a “win‐win”  for the brand manager and the retailer?

4.    Barry Nalebuff is an entrepreneur who has recently launched a bottled organic tea brand called Honest Tea (which can be bought online). He has decided to bid on the Google keyword, “Healthy Beverage,” and would like to know how much to bid on this keyword. For this purpose, he decides to use the PROSAD decision support system. Barry learns from Google that 25,000 daily searches happen, on average, on the Google keyword, “Healthy Beverage.” Suppose that among the people who both search on the keyword “Healthy Beverage” on a given day and also then click on Barry’s sponsored ad, 0.5 % are successfully acquired (i.e., become customers of Honest Tea). Suppose further that the annual profit contribution to Barry per acquired customer is $500.

a.    Barry Nalebuff wants to invest in tracking online clickstream data using Google Analytics and, therefore, understanding the impact of various ranks on clicks. Right now, before having gathered such online data, what would be a conservative bid for Barry Nalebuff to make for the Google keyword, “Healthy Beverage”? Explain your answer.

b.    Over the first quarter of launch, Barry subjectively revises his bids on the Google keyword, “Healthy Beverage” on a daily basis. As his bids change, his sponsored ad’s rank changes and, therefore, the clicks on his sponsored ad change as well. Based on the data collected during the first quarter (using Google Analytics software), Barry estimates the relationship between click‐through rate (CTR) and sponsored ad rank, and it is as follows: ln (CTR) = ‐ 1.5 ‐ 0.5 * RANK. Barry also estimates the relationship between cost‐per‐click (CPC) and sponsored ad rank, and it is as follows: ln (CPC) = 1 – 0.2 * RANK. Which increases at a faster rate going from an inferior rank (say, X+1) to a superior rank (say, X): click‐through‐ rate or cost‐per‐click? Does this imply that Barry’s optimal bid for the keyword “Healthy Beverage”  would be higher than, or lower than the conservative bid, calculated in question 4 (a) ? Why?

c.    Suppose Barry Nalebuff bids the optimal bid for the Google keyword, “Healthy Beverage” as recommended by the PROSAD decision support system. What rank would he obtain for such a bid?

d.    What would be the transactional profit that Barry Nalebuff obtains from the above bid?

5.    The CVS store at Clayton and Big Bend ran a 40 % off price promotion on Haagen Daaz ice cream during the week of Thanksgiving. The store observed a 400 % sales increase (“gross  lift”) for Haagen Daaz ice cream that week. That is, weekly sales of Haagen Daaz during the week of promotion were 5 times the usual amount of weekly sales observed for Haagen Daaz ice cream at the store. However, not all of the gross lift can be called incremental to CVS. The part of the gross lift that can be called incremental to CVS (“incremental lift”) is a sum of 6 components:

a.    Consumers who would have bought Haagen Daaz at nearby competing stores (Schnucks, Walgreens etc.) during the week of Thanksgiving ended up buying HaagenDaaz ice cream at CVS instead,

b.    Consumers who would have bought other ice cream brands (Ben & Jerry, Breyer etc.) at nearby competing stores  (Schnucks, Walgreens etc.) during the week of Thanksgiving ended up buying Haagen Daaz ice cream at CVS instead,

c.    Consumers who would have bought Haagen Daaz at nearby competing stores (Schnucks, Walgreens etc.) during the week following the Thanksgiving  week ended up buying Haagen Daaz ice cream at CVS instead during the week of Thanksgiving (i.e., “accelerated” their ice cream purchase by a week on account of the promotion),

d.    Consumers who would have bought other ice cream brands (Ben & Jerry, Breyer etc.) at nearby competing  stores  (Schnucks,  Walgreens  etc.) during  the  week  following  the Thanksgiving week  ended up buying Haagen Daaz ice cream at CVS instead during the week of Thanksgiving (i.e., “accelerated” their ice cream purchase by a week on account of the promotion),

e.    Consumers who would have anyway bought Haagen Daaz at CVS during the week of Thanksgiving (even if the promotion were absent) ended up buying more quantity of Haagen Daaz than usual because of the promotion (without decreasing their future purchasing), and