In recent years, U.S. car manufacturers have charged lower prices for cars in western states in an effort to offset the competition from Japanese cars. This twotier pricing scheme has upset many car dealers in the eastern states. Many have called it discriminatory and illegal. What conditions are necessary for this pricing scheme to be profitable to the U.S. companies?

The two-tier pricing scheme is implemented by U.S. car manufacturers to offset the competition from Japanese cars in the western states. The lower prices in western states aim to attract buyers who would otherwise purchase Japanese cars, thus increasing U.S. companies' market share in that region.

For the two-tier pricing scheme to be profitable, the extra revenues generated from increased sales in the western states must exceed the lost revenues from charging lower prices. Mathematically, this can be represented as: P = (Increased Sales * Lower Price) - (Original Sales * Original Price) > 0 where P is the profit from the two-tier pricing scheme.

To ensure that the two-tier pricing scheme is profitable, the following conditions must be met: 1. Elasticity of demand: The demand for U.S. cars in the western states should be price elastic, meaning that a decrease in price results in a proportionally greater increase in sales volume. This will ensure that the revenues generated from increased sales in the western states can offset the lost revenues from charging lower prices. 2. Cost structure: The cost structure of U.S. car manufacturers should allow them to absorb the lower prices in the western states without incurring significant losses. In other words, the variable cost of producing and distributing an additional car should be lower than the price charged in the western states. 3. Market share: The U.S. car manufacturers should be able to achieve a significant increase in their market share in the western states as a result of the two-tier pricing strategy. This will help ensure that enough sales volume is generated to make the scheme profitable. 4. Limited market spillover: The two-tier pricing scheme must not result in a significant number of customers in the eastern states purchasing cars from western states to take advantage of the lower prices. Otherwise, the lost revenues in the eastern states would outweigh the increased revenues in the western states, resulting in a net loss for U.S. car manufacturers. This can be accomplished by strategically limiting the availability or promotion of lower-priced cars in the western states or imposing restrictions on cross-state sales.

While focusing on the profitability aspect of the two-tier pricing scheme, it is also necessary to consider the potential legal implications and the backlash from car dealers in the eastern states. While it is not within the scope of this exercise to provide a comprehensive legal analysis, it is important to recognize that successful profitability may be undermined by potential legal challenges and negative public relations.