What is game theory? Explain it with a situation in which game theory is applicable, along with any description of the two rival's strategies.© BrainMass Inc. brainmass.com October 25, 2018, 7:17 am ad1c9bdddf
Game theory is used to model the behaviour of oligopolies. Unlike monopolies, oligopolies have market competitors, but unlike perfectly competitive firms and monopolistically competitive firms, oligopolistic firms have so few competitors that pricing and marketing decisions made by one firm can affect all the other firms. This means that firms must take their ...
This solution uses the example of Coke and Pepsi to illustrate game theory. It explains why game theory is used to analyze oligopolistic markets, and uses a payoff matrix to show why Coke and Pepsi engage in non-price competition but not price competition.
Game theory question on pricing
11. Coca-Cola and Pepsi Co are the leading competitors in the market for cola products. In 1960 Coca Cola introduced Sprite, which today is the worldwide leader in the lemon-lime soft drink market and ranks 4th among all soft drinks worldwide. Prior to 1999, PepsiCo did not have a product that competed directly against Sprite and had to decide whether to introduce such a soft drink. By not introducing a lemon lime soft drink, PepsiCo would continue to earn a $200 million profit, and Coca-Cola would continue to ear a $300 million profit. Suppose that by introducing a new lemon lime soft drink, one of the two possible strategies could be pursued: 1) PepsiCo could trigger a price war with Coca-Cola in both the lemon-lime and cola markets, or 2) Coca-Cola could acquiesce and each firm maintain its current 50/50 split of the cola market and split the lemon lime market 30/70 (PepsiCo / Coca Cola). If PepsiCo introduced a lemon-lime soft drink and a price ware resulted, both companies would earn profits of $100 million. Alternatively, Coca Cola and Pepsi Co would earn $275million and $227 million, respectively, if PepsiCo introduced a lemon lime soft drink and Coca Cola acquiesced and split the markets as listed above. If you were a manager at Pepsi Co, would you try to convince your colleagues that introducing the new soft drink is the most profitable strategy? Why or Why not?
13. Price comparison services on the Internet (as well as "shopbots") are a popular way for retailers to advertise their products and a convenient way for consumers to simultaneously obtain price quotes from several firms selling an identical product. Suppose that you are the manager of Digital Camera, Inc., a firm that specialized in selling digital cameras to consumers that advertises with an Internet price comparison service. In the market for one particular high-end camera, you have only one rival firm - The Camera Shop- with whom you competed for the last four years by setting prices day after day. Being savvy entrepreneurs, the ease of suing the Internet to monitor rival firms prices has enabled you and your rival to charge extremely high prices for this particular camera. In a recent newspaper article, you read that The Camera Shop has exhausted its venture capital and that no new investors are willing to sink money into the company. As a result, The Camera Shop will discontinue its operations next month. Will this information alter your pricing decisions today? Explain.View Full Posting Details