Question

Some years ago, an article appeared in the New York Times about IBM’s pricing policy. The previous day,IBM had announced major price cuts on most of itssmall and medium-sized computers. The article said:

IBM probably has no choice but to cut prices periodicallyto get its customers to purchase moreand lease less. If they succeed, this could makelife more difficult for IBM’s major competitors.Outright purchases of computers are needed for ever larger IBM revenues and profits, says Morgan Stanley’s Ulric Weil in his new book, InformationSystems in the 80’s. Mr. Weil declares that IBM cannot revert to an emphasis on leasing.

a. Provide a brief but clear argument in support of the claim that IBM should try “to get its customers to purchase more and lease less.”

b. Provide a brief but clear argument against this claim.

c. What factors determine whether leasing or selling is preferable for a company like IBM? Explain briefly.

Short answer

1. It will increase the revenue of IBM.

2. IBM will lose those consumers who could pay the lease price but not the total price of the computer.

3. The knowledge of demand and consumers reservation prices for computers determine whether leasing or selling is preferable.

Step-by-step solution

Step 1. Argument in support of the claim

The claim states that IBM should cut prices of its computers periodically so that more consumers can afford to buy them. If IBM does this, its revenue will increase with each computer sold in the market. It can improve the demand for its computers by systematically abolishing the lease of computers to its potential consumers.

The decreased availability of computers for lease will compel consumers to purchase computers and continue their work. The decrease in the price of small and medium-sized computers will allow more consumers to buy them. Both the decisions will increase the number of computers sold by IBM in the market. The market share will increase along with the revenue.

Step 2. Argument against the claim

The article suggests decreased leasing of computers. If IBM decides to cancel this system, it will lose those consumers who can afford the lease price but not the buying price of computers. IBM may end up decreasing its demand in the market.

Step 3. Factors that will determine the preferable pricing decision

• Knowledge of demand:Before deciding to go for a lease pricing strategy or selling strategy, IBM should try to gain all the possible knowledge regarding the demand for computers in the market. It will help the company to know about its potential consumers.

The company will be able to price discriminate between consumers with the help of 'knowledge about demand' and earn a maximum profit under different pricing policies.

• Reservation price of consumers for computers:The company should conduct surveys and adopt several other methods to measure the reservation price of its consumers. It will help the company categorize the consumers based on their reservation prices.

It can then decide about both strategies' overall benefit (lease or sell).

The above factors will help IBM judge the preferable system of providing computers to its consumers.