Assume that lexus (l) is the first automobile company to produce a luxury class hybrid automobile and is the only such company for the past four years. bmw is now considering producing its own luxury hybrid automobile and lexus must decide whether or not to lower the price of its luxury hybrid to counter bmw's entry into the luxury hybrid niche. should lexus lower its price in order to deter bmw's entry into the luxury hybrid automobile market?
the lexus-bmw entry game enter lexus: $280 million bmw: -$100 million bmw decision: enter or retreat from market lower price retreat lexus: $320 million bmw: 0 lexus decision: lower price or keep price lexus: $280 million enter bmw: $120 million keep price bmw decision: enter or retreat from market retreat lexus: $400 million bmw:
a) in terms of profit earned, it makes no difference whether
lexus lowers its price or not; in either case it will make $280 million profit if bmw enters.
b) no, because bmw will enter the market regardless of lexus' decision about its price.
c) yes, it will drive bmw out of the market.
d) no, it should keep the same price and work to capitalize on its brand loyalty.