Breville, an Australian maker of small kitchen appliances, has been selling an espresso machine called the Breville Dual

Boiler (BDB) for more than a year. Your task is to comment on the market for the BDB and Brevilles cost structure, pricing strategy and profits following the points below: a) Which other products can be compared to the BDB? That is, what are the likely substitutes for the BDB? [Hint: look for what the BDB can do (and how well) compared to other coffee machines taking into account the price at which they are sold.] b) Are the BDBs substitutes close? That is, does Breville face a strong competition in the BDBs price range? Is Breville likely to have a little or a lot of market power when selling the BDB? [Note: a perfectly competitive firm has not market power at all, a monopolist has huge market power.] c) Is Breville likely to have a cost advantage over their competitors on the production of the BDB? [Hints: 1) find out where the BDB is assembled and where the competing machines are manufactured. 2) Are economies of scale likely to play a role? Why?] d) What is the BDBs recommended retail price (rrp) in Australia? What is the BDBs rrp in the USA? Is the BDB sold at different prices in Australia? If so, what is the price range? In light of your previous answers and your knowledge of economics, what is driving this price dispersion? a,b) The likely substitutes for the Breville Dual Boiler (BDB), and thus its main competition, are the Lelit PL60T Dual Boiler, Sunbeam Cafe Bellissimo and the Rancilio Silvia. While the PL60T rivals the BDB with features such as the important dual boiling system, PID temperature control and configurable pre-infusion (the Silvia also offers this), when price is factored into the equation it becomes apparent that the BDB is well ahead of its competitors in terms of substitutability with respect to price. Those competing machines that are priced above the BDB (PL60T), fall short in the face of the myriad of extra functions the BDB has, including a shot clock to monitor the duration of the shot of coffee to ensure it is within its optimal range, volumetric control that is both manual or customizable, and a commercial steam wand which swivels 360 degrees. The Caf Bellissimo and Silvia are much cheaper than the BDB, and can to some extent produce the same output (espresso), however there is a great disparity between their overall quality and included features when compared to the BDB. This means that those coffee connoisseurs with more inelastic demand curves will pay the relatively higher price for the BDB given its array of functions and features. Therefore, the PL60T remains the biggest competitor to the BDB. c) The BDB is made in China, while its main competitor, the PL60T, is made in Italy. Considering these facts alone, it would appear that the BDB has a cost advantage over its competition, namely the PL60T. This is because China is a world leader in cheap labour and manufacturing, although it is important to note that the cheap labour that has made Chinas factories nearly unbeatable is not so cheap anymore (NY Times 17/2/2012

main pc///just a referencing note for me). Regardless, Brevilles decision to outsource its manufacturing to China creates a cost advantage as it is able to enjoy lower production costs than its Italian counterparts, as well as gaining the additional utility of risk-reduction as Italys economic environment is currently far more volatile than Chinas. Moreover, Radelet and Sachs mention that shipping costs have decreased internationally on a sustained basis for years, and thus the value of cheap labour from countries with access to good shipping routes (i.e. China) is potentially more valuable than producing in the local market with high labour costs. Contrastingly, manufacturing an espresso machine in Italy creates positive connotations of authenticity, quality and culture, which Breville foregoes in lieu of a cost advantage. Economies of scale? d)