Question

(3) (1 pt) When a seller offers a volume discount to a buyer, the seller should eliminate arbitrage and cannibalization a) Consider the CPA classes at a bank and their pricing based on volume discounts. Also consider CPA classes offered to general public. Explain if/how arbitrage happens. Explain if/how cannibalization happens b) Consider a software licensed to multiple users at a single company and the licensing fee per user has a volume discount. Explain if/how arbitrage happens. Explain if/how cannibalization happens. c) Consider a commercial building contractor who spends millions of dollars on buying galvanized pipe from a supplier. The supplier sells the galvanized pipes in high volumes to building contractors and in low volumes to repair companies. The contractor buys the pipes with a volume discount. Explain if/how arbitrage happens. Explain if/how cannibalization happens d) Consider the three contexts above. In which context arbitrage is more likely to happen? In which context cannibalization is more likely to happen?

Answer 1

Answer:- Date:---16/10/2019 A. CPA classes are offered at bank and the price offered by CPA to bank based on volume discounts. Also CPA classes offer the courses to general public at the cost of individuals. Arbitrage Happening: Arbitrage is defined as the process of simultaneous buying and selling of an asset, on the basis of price differences in one location/market to other location/market. Thus helps to earn cash as a profit for a trader, who buys and sells the assets simultaneously. So here the CPA is offering the classes to bank at pricing based on volume discount. Thus bank is getting the CPA classes services at lower price than general market price for an individual. If the bank sells these services to general public, then bank is doing arbitrage, and earning profit by selling at market prices which is higher than what bank got from CPA classes directly on volume based discount. Cannibalization Happening: cannibalization means reduction in sales volume, revenue, market share of a existing product by new product of the producer. Thus the new product lowers the sale of the existing product. So here, if the CPA classes directly sells the CLA classes service to individuals, then they may have higher sale volume, but if the Bank sells the CPA classes, then their sales volume will be lowered. Thus direct sale of CPA classes will be lowered by the Bank sales option. Arbitrage Happening: The licensed software to a company is on a volume based discount. So the price of software to company user is at low price. If company sells these software to other user at normal price, then arbitrage can happen. Thus company can earn profit by selling the licensed software to users at market prices.

Cannibalization Happening: Company sells software by two methods – one by direct sale in the market at market prices and other via company. Thus the direct sale of the licensed software may be lowered due to sale by company in market. Thus cannibalization happens here by reducing the direct sale of licensed software by selling through company. Arbitrage Happening: The Building contractor buys the galvanized pipes from the supplier on volume based discount. If contractor sales this pipes directly in the market, then he will earn profit. The supplier direct sales the pipes in the market, then he will sale at higher prices. Thus contractor can do arbitrage and earn profit. Cannibalization Happening: Supplier sales the pipes in market with two ways, one through contractor and other through direct user in the market. Thus the direct sale of the galvanized pipes may be lowered due to sale by contractor in market. Thus cannibalization happens here by reducing the direct sale of pipes by selling through contractor. D. • Arbitrage is more likely to happen in the third case of supplier sales the galvanized pipes. Cannibalization more likely to happen in the first case of CPA classes ·