Pricing Decisions

This article is a good example of the topics we will discuss in our next meeting. 

Lululemon Sales Rise, Gross Margin Declines

by: Lisa Beilfuss
Sep 11, 2015
Click here to view the full article on WSJ.com

TOPICS: Pricing

SUMMARY: Lululemon Athletica Inc. reported a one-percent increase in second-quarter sales, but the gain came at the expense of a gross margin that declined sharply from a year earlier.

CLASSROOM APPLICATION: Using demand and cost functions for a product in which a manufacturer has market power, students can evaluate the tradeoff between sales and unit profit (= price : average cost). They can then examine the conditions under which Lululemon would optimally lower price, and as a consequence reduce unit profit, to increase sales.

QUESTIONS: 
1. (Advanced) Define profit margin. Define unit profit. What is the relationship between the two concepts?

2. (Introductory) What factors have caused Lululemon's profit margin to decrease?

3. (Advanced) Suppose a firm is operating on a segment of its average cost curve in which average cost is increasing in output. If the firm, which has market power, lowers its price to increase sales, will the firm necessary experience a decrease in unit profit?

4. (Advanced) Is it possible that Lululemon is increasing profits by lowering prices of its products, despite a decrease in profit margin?

Reviewed By: James Dearden, Lehigh University