Case Study: Oasis Inc.

s Tranquility 5000 Massage Chair Price Analysis

Oasis, Inc. is preparing for a major launch of their newest product, the Tranquility 5000, their
newest heated luxury massage chair. The purpose of this analysis is find the optimal retail price
for the massage chair by looking at and comparing the data between the weekly quantity
demanded and quantity supplied. Company executives and board members are particularly
interested in estimating the equilibrium price and quantity, as well as the price point that will
maximize the revenue for the Tranquility 5000. This analysis should inform Oasis Inc., the
company executives, and its board members of the optimal price point that will create a
successful product launch.

For this analysis, the raw demand data was previously collected over the course of n=100
test weeks by Oasis, Inc. The data was then plotted with the quantity demanded as the response
variable and the price as the single explanatory variable. Figure 1 shows the plotted data as a
scatterplot. This graph shows the relationship between the price and quantity demanded, which
appears to be linear, therefore a linear regression is appropriate for estimating the weekly
demand function for the Tranquility 5000. With further examination of the graph, there appears
to be no extreme outliers. The analysis of variance (ANOVA) and coefficients tables from the
model fit are provided in the appendix (see tables 1 & 2). Using this linear regression model,
69.77% of variation in quantity demanded can be explained, with a typical size error of
prediction to be 5.29 units demanded. The relationship between price and quantity demanded
was statistically significant at the = .05 level, t ( 98)=15.041 , p < .0001. With sufficient
evidence to support a statistically significant relationship between price and quantity demanded,
the estimated demand equation is given in the appendix as Equation 1.

Elasticity of demand methods were used in this analysis to determine the price point at which the
Tranquility 5000s revenue is maximized. An elasticity of demand equation ( E ( p ) ) was
constructed using differential calculus based methods (see Equation 2). Using this equation, a
price point of $11,319.74 was found to be the price point at which the Tranquility 5000s revenue
is maximized. This maximum revenue was calculated by finding the price where demand was
unitary (equal to 1) in the elasticity of demand equation.

In order to ensure a thorough price analysis for the Tranquility 5000, the weekly supply data had
to be analyzed as well. The raw supply data was also previously collected over the course of
n=110 test weeks by independent market analysts. The data was then plotted with quantity
supplied as the response variable and the price as the single explanatory variable. Figure 2 shows
the plotted data as a scatterplot. This graph shows the relationship between the price and quantity
supplied, which appears to be linear, therefore a linear regression is appropriate for estimating
the weekly supply function. Again, by looking at Figure 2, it appears that there are no extreme
outliers. The analysis of variance (ANOVA) and coefficients tables from the model fit are
provided in the appendix (see tables 3 & 4). This linear regression model explains 84.65% of
variation in quantity supplied, with a typical size error or prediction to be 1.97 units supplied.
The relationship between price and quantity supplied was statistically significant at = .05 ,
t (108)=24.403, p<.0001 . With evidence to support a statistically significant relationship
between price and quantity supplied, an estimated supply equation can be calculated (see
Equation 3).
After estimating both the supply and demand functions, the equilibrium price and quantity for
the Tranquility 5000 can be calculated by setting both the demand and supply equations equal to
each other. This calculation identified that the equilibrium price is $10,404.39 with an
equilibrium quantity of 97. This visualization can be seen in Figure 3, where both functions are
plotted together, where their point of intersection is the equilibrium price.

After identifying where demand is unitary for the elasticity of demand equation and identifying
the price point at which the supply and demand functions are equal, this resulted in two potential
estimates for the maximized revenue of the Tranquility 5000. First, the revenue estimated using
the price point $11,320.27 and the equilibrium quantity of 97 yielded a maximized revenue of
$1,098,066.19. Second, the revenue estimated using the price point $10,404.30 and the
equilibrium quantity of 97 yielded a maximized revenue of $1,009,225.83.

In summary, this complete price analysis of the Tranquility 5000 Massage Chair should be
utilized as a tool by Oasis, Inc. when determining the most favorable selling price. This analysis
informs the company of the optimal retail price(s) that will produce maximum revenues. Using
the data and calculations from above, it can be seen that the revenue for the Tranquility 5000 will
be maximized when the unit price is set anywhere between $10,404.30 and $11,319.74. It is
hopeful that if the massage chair is sold between these price points it will yield the maximized
revenue and result in a successful product launch for the Tranquility 5000.
 APPENDIX

Supporting Equations, Tables, and Graphs

Figure 1: Scatterplot for Estimating the Demand Function

Tables 1 & 2: Regression Analysis: Estimating the Demand Function

y=f ( p )=179.470.007927 p (1)

0.007927 p (2)
E ( p )=
179.470.007927 p
Figure 2: Scatterplot for Estimating the Supply Function
Tables 3 & 4: Regression Analysis: Estimating the Supply Function

y=s ( p )=45.91+0.004910 p (3)

Figure 3: Scatterplot for Visualizing the Demand and Supply Functions and Raw Data