Cases for Demand

Case 1:Quantity demanded at a negative price: Hoover’s

free flight promotion

In Autumn 1992, the British home appliance manufacturer, Hoover, offered two free air travel
tickets to every customer who purchased an appliance with a price of £100 or more. Each
ticket was valid for round-trip travel to continental Europe or the United States. The market
value of a pair of tickets exceeded £400.

For a £100 appliance, Hoover’s effective price was £(100  400)  £300; that is, the
company was paying each customer £300 to take an appliance. As might be expected, huge
numbers of consumers were willing to buy Hoover appliances on those terms. The promotion
attracted over 100,000 customers.

Hoover’s management, however, had not anticipated this response. It had to establish a
special 250-person task force to deal with the flight bookings and set aside £48 million to
cover the cost of over 200,000 free flights. William Foust, president of Hoover Europe, and
two other senior executives were dismissed for their role in the promotion.

At the time of the promotion, Hoover was owned by the American appliance manufacturer
Maytag. In May 1995, Maytag sold Hoover to an Italian home appliances group for £106
million.

Source: “Hoover ‘Free Flights’ Scheme Costs 48 Million Pounds,” Financial Times, April 21,
1994, p. 7; “Hoover Sold after Free Flights Fiasco,” The Times, May 31, 1995.
Case 2:Mobile Telephony: Pre-paid vis-à-vis Post-paid

Pre-paid service caters to different market segments from contract (also called “post-paid”)
service. The pre-paid customer segments include people that the service provider would
consider a bad risk for contract service – those without a regular high income, migrant
workers, and travelers.

To the extent that it caters to customers with relatively lower income, pre-paid service is an
inferior product. As incomes rise, users would upgrade from pre-paid to contract service. In
this regard, the demand for pre-paid service is similar to that for paging service. Paging
service is an inferior good. Worldwide, as incomes have risen, consumers have switched from
paging to mobile telephone service. Consumers have also switched because the price of
mobile telephone service has fallen.
Case 3:How would you like your music?

In 1998, the value of worldwide sales of recorded music in the form of singles,

music cassettes, and CDs was $38.7 billion. In Canada, with a 30.2 million population, sales
of CDs were 77.2 million units, and sales of music cassettes were 11.2 million units. On
average, each Canadian bought 2.6 CDs and 0.4 music cassettes. By contrast, in Argentina,
with a slightly larger population of 36.1 million, CD sales were 18.5 million and music cassette
sales were 6.7 million, which translated to 0.5 CDs and 0.2 music cassettes per capita.

Canadians enjoyed higher incomes than Argentine consumers. In 1998, Canadian GDP per
capita was $19,831, while that for Argentina was $9,413. The difference in incomes explains
why the average Canadian bought more of both CDs and music cassettes.

Canadians also bought relatively more CDs (and relatively fewer music cassettes) than
Argentine consumers. The ratio of CD to music cassette purchases was 6.5:1 in Canada, and
2.5:1 in Argentina. One explanation of this disparity is that music cassettes were a relatively
inferior product compared to CDs.

Another possible explanation of the disparity is a difference in the relative prices of music
cassettes and CDs. In Canada, the average price of a music cassette was $6.06, while the
average price of a CD was $11.55. In Argentina, the average prices were $7.80 and $13.80.
Since CDs were relatively cheaper in Argentina, differences in prices probably do not explain
why Canadians bought relatively more CDs than Argentine consumers.

Source: The Recording Industry in Numbers, 99, International Federation of the

Phonographic Industry (London, 1999).
Case 4:Home football games: to broadcast or not to
broadcast?

In the 1999 National Football League (NFL) season, the Tennessee Titans won 13 games
and lost 3 to qualify for the Super Bowl XXXIV in Atlanta. In what NFL Insider Magazine
described as “perhaps the most exciting Super Bowl ever played,” the Titans held down the
St. Louis Rams for most of the game. However, in the final minutes, the Rams’ Isaac Bruce
caught a 73-yard touchdown pass and doomed the Titans to a 16-23 defeat.

Like other NFL teams, the Titans make money from sales of tickets and food, beverage, and
other concession items at live games. Increasingly, however, gate and concession income has
been overshadowed by earnings from television broadcasting. In 1998, CBS won the rights to
broadcast the NFL’s American Football Conference for a bid of $500 million a year, while the
Fox Network won the NFL National Football Conference rights for $550 million a year. The
broadcast fees are divided among the NFL teams.

What is the relationship between live broadcasting of away games and the
demand to attend home games? Live broadcasting of away games entertains fans
when their home team is playing away and stimulates popular support for the
home team and interest in attendance at home games. Accordingly, live
broadcasting of away games and attendance at home games are complements.

Live broadcasting of home games, however, may draw fans away from attending the game in
person. To this extent, the two products are substitutes. On the other hand, live broadcasting
of home games also stimulates popular support for the home team and hence attendance at
home games. To this extent, the two products are complements.

Whether NFL team owners should allow live broadcasting of home games depends on the
balance among these effects. The solution, enforced by federal law, is to allow broadcasting
of home games only if they are sold out. Further, federal law requires that such broadcasts
must show the entire game. This rule tends to squeeze out broadcasting of games from other
cities and helps to focus the local television audience on their home team.
Source: Harris Molloy, Jr., NFL Insider Magazine
(http://www.nfl.com/sb34/features/000130titansdefense.html)

Case 5:Financing New Vehicle Purchases

In a study of replacement demand for vehicles it was noted how the auto industry improved
demand for new vehicle by promoting leasing programs. These leasing programs provide
buyers a lower cost of entry for new vehicles compared to bank loans. The promotion of
leases provided a substitution for bank loans and increased the percentage of vehicle under a
loan or lease agreement from 26.3% in 1992 to 34.5% in 2001. Leases became attractive to
buyers; who typically could not get bank loans, by providing an opportunity to upgrade to
higher priced models and who regularly replace vehicles in 2-4 year increments. Leases
provided for increased demand but also caused substitution of bank loans, in 1992 8.5% of
recent model vehicles were under lease, and this increased to 17.5% in 2001.

Source: “Vehicle purchases, leasing, and replacement demand: evidence from the Federal
Reserve's Survey of Consumer Finances,” Business Economics, April, 2004 by Ana Aizcorbe,
Martha Starr, James T. Hickman, April 2004
Case 6:Demand for used cars

The American consumer’s demand for used cars grew steadily over the 1990s. In 1990, the
average passenger car in use was slightly over 7.5 years old. By 2002, the average age had
risen to over 8.4 years. A major reason for the increasing demand for used cars was the fast
rising price of new cars. Between 1993 and 2002, the median household income rose by
35.6%, and the consumer price index rose by just 24.5%. By contrast, over the same period
the average price of a new car rose by 43.8%.

The demand for used cars also grew because of the increasing quality of used cars. A further
reason was that automobile manufacturers reduced the frequency with which they changed
designs. Car dealer David Ash remarked that consumers “often can buy a car 2 or 3 years old
that looks pretty much like the newest model.”

Historically, financial institutions charged higher interest rates on loans for used cars. Over
time, however, with the improvement in automobile quality and the shift of middle-income
consumers towards used cars, financial institutions began to offer more favorable rates. This
gave a further lift to the demand for used cars.

Sources: “America’s New Darling: the Used Car,” Asian Wall Street Journal, November 2,
1994, p. 20; “Second Time Around,” Atlanta Journal and Constitution, November 15, 1996, p.
S01; and National Association of Automobile Dealers.
Case 7:China’s mobile carriers: Increasing sales,
declining ARPU

China is the world’s largest mobile telephone market, with 233.6 million subscribers
comprising 18.1% of the national population. The Chinese market is dominated by two
carriers – China Mobile and China Unicom, with shares of 64.8% and 34.6% in their
respective service areas. Both China Mobile and China Unicom have expanded their
businesses primarily by recruiting new customers rather than introducing new services.
Essentially, the two carriers have been selling down their demand curves.

They have done so by cutting prices and also by expanding the number of pre-paid
subscribers. Generally, pre-paid subscribers spend less than contract (post-paid) subscribers.
In 2003, China Mobile’s average revenue per user (ARPU) was 58 yuan per month among
pre-paid subscribers compared with 171 yuan per month among contract subscribers.

Between 2001 and 2003, the proportion of China Mobile’s customers subscribing to pre-paid
service increased from 48% to 64%. Over the same period, the company’s overall ARPU
(from pre-paid and contract subscribers) fell from 141 to 102 yuan per month.

A secondary reason for the systematic decline in ARPU is the two carriers’ record of
acquisitions. For instance, in 1997, when China Mobile was listed on international stock
exchanges, it comprised businesses in China’s wealthiest areas – the major metropolitan
areas such as Beijing and Shanghai and the coastal provinces. Since then, it has acquired
various service providers in poorer regions. Customers in these regions spent less than those
in metropolitan areas. Hence, the acquisitions further diminished China Mobile’s overall ARPU.
Case 8:Bethel, Alaska: Cab Capital

Rachel D’Oro of the Associate press stated, “You won't find a luxury hotel or concert hall in
Bethel, and you probably can't even get a decent bagel here. But this remote Alaska town
has at least one advantage over New York City: It might be the nation's cab capital.”

By recent accounts Bethel has between 70 and 100 taxi cabs and 2000 United States census
reports the population at 5471 residents. That roughly equals 1 cab per 64 residents
compared to New York City with a hired vehicle rate (taxi, commuter van or livery car) of
about 1 per for every 149 people.

What allows this demand to flourish?

Taxis become economically attractive when the cost of paying someone to drive for you is
less than the costs of owning a car or walking.

This is the case in Bethel.

The substitute of owning a car (instead of taking a taxi) is quite expensive.

• Bethel is inaccessible by road. Cars must be barged up the Kuskokwim River during the
summer or flown in with the lowest air freight cost at about $2,000.

• Gas costs between $5 to $7 per gallon in Bethel. With the entire winter fuel supply shipped
in by river barge and stored over the winter.

There are additional barriers to owning a car.

• Owning a car is a significant investment but does not have a lot of cross-function since the
town consists of a single 10 mile paved road.

The substitute of walking (instead of taking a taxi) is less than appealing.

• Bethel is on Alaska’s western delta plain. It is often not a hospitable place for walking in
summer because of bugs or in winter because of the extreme cold.

This demand is high (at the far right of the Supply-Demand graph) because there are limited
substitutes and significant perceived utility.

If cabbies were able to charge prices based on a free market system instead of the fixed
rates the city requires one would expect that as additional supply was brought to the
marketplace the cost would decrease.

It is worth noting that there are additional barriers keeping the supply lower than the
marketplace naturally might accept including the following: steep insurance, dispatcher fees,
cost of automobile repair, Bethel’s high cost of living, physical risk of driving a cab, and
Bethel’s Public Safety and Transportation Commissions May 14, 2007 goals to reduce the
number of Taxi Permits.

noted references

United States 2000 census data Retrieved February 16, 2008 from
http://censtats.census.gov/data/AK/1600206520.pdf

D'Oro, R. (July 23, 2007 ). Taxis on the tundra. The Associated Press. Retrieved February 16,
2008 from http://dwb.adn.com/news/alaska/rural/story/9155250p-9071788c.html
Case 9:Emergency Room Demand

By getting consumers to switch to so-called high-deductible insurance plans – in exchange for

lower insurance premiums – the health care industry seeks to reduce demand for emergency
room services.

Health care insurance commonly utilizes two-part pricing, charging the customer a
subscription fee along with a variable usage charge, typically a percent of the charges
incurred. In an effort to reduce the cost of providing medical services, the industry is trying to
change consumer behavior and reduce emergency room usage, instead encouraging patients
to seek out primary care and family physicians.

By lowering the subscription fee and increasing deductibles, the price of an additional unit of
service is higher than under traditional insurance plans (until the deductible is met). The
results are starting to come in, and a March 2007 study shows a 10% reduction in demand
for ER services among those covered by high deductible healthcare plans.

It should be noted that total revenue from ER services will decrease with this type of
modification. The intent is to increase demand for the substitute of primary care and increase
revenue for these services, where the profit margin is expected to be higher.

As for the long-term impact of reduced emergency room visits, we suppose time will tell.

Source: Cooney, E. (2007) High-deductible plan cuts ER use, study finds. Boston.com.
Retrieved on Feb 21, 2008 from

http://www.boston.com/yourlife/health/blog/2007/03/highdeductible.html