Explain the model that the consultants are trying to develop in order to find the price per container/TEU that maximizes Maersk's revenue. Extensions Help Last edit was seconds ago Arial Y - 91.7 + BIUA GE IEE 1 2 31 Building a Moder Hagway and her team sought to create value for Maersk by building a predictive model for price on the Asia-North EU lane using the pricing dynamics between the two market share leaders-Maersk and CMA/MSC. After poring through available market data (including volumes, prices, and market shares), Maersk's financial figures, and competitor information, Hagway believed her team had created good estimates by making the following assumptions: Maersk's costs per TEU, estimated at $941 per TEU (see Exhibit 9)20 CMA/MSC's estimated costs per TEU, which were higher at $1,008 per TEU²¹ The current market shares of both Maersk and CMA/MSC, 23.2% and 25.8% respectively. This market share remains constant if both offered the same price. An estimated market size for 2012 of 21.3 million TEUS. As container transport rates are fairly insignificant compared to the value of assembled goods, this demand is assumed to be inelastic. Also, limited alternatives exist for clients to use anything other than containers (typically air transport is used only for high value goods such as iPads). Assumptions of price sensitivity-switching from one company to another. Hagway's firm based the price sensitivity of the industry on previous research and determined that for every 100 unit difference in rates, there would be a 5% shift in market share. The combined market share for the Asia-North EU route of Maersk and CMA/MSC is 49% and the rest of the industry is served by a long tail of other players- whose aggregate market share is assumed to be constant vis-à-vis Maersk + CMA/MSC regardless of their pricing decisions (as they cannot add capacity overnight to take share from Maersk + CMA/MSC). The assessment led to a set of so-called reaction functions that were used to generate a matrix mapping profit contribution for both players at various price levels (see Exhibit 10). The functions used were: Ei hp O regardless of their pricing share is assumed to be constant vis-à-vis Maersk + CMA/ decisions (as they cannot add capacity overnight to take share from Maersk + CMA/MSC). The assessment led to a set of so-called reaction functions that were used to generate a matrix mapping profit contribution for both players at various price levels (see Exhibit 10). The functions used were: Market size-21.3 million TEUs for 2012 Market shareMask 0.232+ (PCM-Pank) x (1/2000) Market sharec-0.258+ (PMansk-PCM) X (1/2000) ContributionMark (Pemk-$941) x (21.3) x (Market shareMank) Contribution (PCM- $1,008) x (21.3) x (Market shareCM) I The team also assumed that Maersk and CMA/MSC simultaneously made their pricing decisions, without knowing what the other would do. Hagway's goal was to create a tool that would help Maersk's executive team make a decision on pricing levels for the pivotal Asia-North Europe route for 2012-one that would take into account the CMA/MSC alliance's likely price move. After reviewing the model one last time, Hagway hit the 'send' button forwarding it along to the team's 'proxy CEO'-Pat Henshaw,