Business Proposal

Business Proposal
Ira Johnson, Jr.
ECO/561 Economics
December 3, 2012
Dr. Caryn Callahan

Business Proposal
In an effort to serve the CVS Pharmacy’s consumer base better, the need to offer a wider variety of prescription medication selections and options system-wide. In this proposal, assumptions about the elasticity of demand and the market structure for these medications and expanded services will be included. Additionally, how the expansion will increase revenues will be explained. Further, a rationale for determining the profit-maximizing quantity will be provided.  
Decisions will be made by using the concepts of marginal costs and marginal revenue to maximize profit. A mix of pricing and non-pricing strategies will be suggested. This proposal will also explore options of creating or increasing barriers to entry. Further, increased product differentiation will be discussed. Finally, other way to minimize costs will be explored.
Market Structure and Elasticity of Demand
CVS retail pharmacies operate in a monopolistic competition market structure. According to Investopedia (2012), the monopolistic competition is, “A type of competition within an industry where:
1. Firms produce similar yet not perfectly substitutable products.
2. Firms can enter the industry if the profits are attractive.
3. Firms are profit maximizers.
4. Firms have some market power, which means none are price takers.
Firms in a monopolistic competition sell goods that have either actual or perceived non-price differences. These differences are not so significant, however, that they climate the potential for substitutes. The cross-price elasticity of demand in a monopolistic competition, therefore, is positive or high.
Prescription drugs and retail pharmacies are close but imperfect substitutes, which perform the same basic functions but have differences that distinguish them from each other such as location, type, appearance, style, reputation, and quality (Krugman &...