|Question||The following discussion pertains to the pricing policies of Linear Technology Corp.:
Linear made a 39% profit on its $1.1 billion sales in 2006, more than five times the average for U.S. industrial companies. However, other bigger chip makers, including Texas Instruments Inc., Richtek Technology Corp. of Taiwan, and Freescale Semiconductor Inc. of Austin, Texas, are now moving into the market and others may follow suit. Unlike in the digital chip world, in which a single winning design bought by a few big customers can yield huge profits, Linear would rather see its order book packed with small to midsize orders from companies too busy to haggle over prices. Intermec Inc., which makes mobile data scanners, uses Linear chips to obtain extra life from its devices’ batteries. The chips’ total cost is less than 5% of the materials budget. Performance is crucial for this company; price is not.
Traditionally the dozen or so major analog chip companies have tiptoed around one another’s product lines, ing keep profit margins high. Each company established its strength decades ago, making it easy to extend existing product families and deepen relations with longtime customers. “We chip away a little at each others’ specialties,” says Jerald Fishman, chief executive of Analog Devices. “But there isn’t a lot of direct competition.”
Discuss how price elasticity of demand influences the pricing strategies of Linear Technology Corp. What market model best describes this industry? Explain.