Analysis of shifts in the demand curve.
The Xerox Corporation's share of U.S. copier revenues was close to 100 percent in 1970. According to a McKinsey consultant who worked with Xerox,
I can remember as late as 1975 looking at internal Xerox reports showing that market share was a word they had never heard of. They did not have any formal market share information. It had always been 100 percent. Right then, some people started to accumulate some information and the Japanese weren't even listed...The whole company, in terms of competition, was focused n IBM at that time. Everybody was convinced that if they were going to have any competition, it was going to come from IBM. When IBM came out with its first product, a shudder went through Xerox. Later, it was Kodak. Xerox totally missed the fundamental strategy of the Japanese, which was going in at the low end of the market and working up, going for the soft underbelly.
By 1980, Xerox's market share had fallen to 46 percent. One reason was the appearance of a number of low-priced copiers that were introduced in the late 1970s. Perhaps the most successful was the Savin 750, which was introduced in 1975. It had about a third of the parts and a third of the weight of conventional Xerox machines. It cost Ricoh, the Japanese firm that produced it, about $500 to $600 to build, and was sold to Savin for about $1600. Savin in turn sold it to the customer for $4,995. Xerox's comparable copier, the model 3100, sold for about $12,000. The Savin 750 averaged 17,000 copies between failures and took less than 30 minutes to repair. Xerox machines averaged 6,000 to 10,000 copies between failures and took up to twice as long to repair.
The following graph illustrates the revenues and costs of Xerox's model 3100:
(a) Elucidate effect do you think the appearance of the Savin 750 had on the demand curve for Xerox's model 3100?
(b) In response to the Savin 750, Xerox slashed price. Was this the rational thing to do? (use a diagram to illustrate your answer.)
(c) If the two machines sold for the same price, was the Savin 750 likely to outsell the Xerox 3100?
(d) Did the market structure of the copier industry change in the 1970s? if so, how?