Module 8

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Laurentian University *

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Economics

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Feb 20, 2024

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Module 8 Assignment FNCE 5506EL 12 - Managerial Economics (2023F) Prepared for: Prof. James Bowen Prepared By: Dejan, Radojevic Dong Yun, Yan Johnny, Lu Lilian, Soo Md Nuruzzaman Michael, Spiller Salman, Abdul-Salam Tanzila, Mustary Group-C Submission date: November 5, 2023  Why are there usually no winners in price wars? What is involved in a tit-for-tat strategy and how can employing such a strategy be disastrous for all involved?

With stable market demand, price wars reduce sellers’ profit margins without market share improvement. The reduced profit margin will result in less investment in R&D, innovation, and product improvement. When one or some competitors quit this market, the surviving sellers can gain more market share and may gain more bargaining power from suppliers. It is uncertain whether the customers can accept raising the price to normal or higher since the price wars have increased customers’ expectations to get low-priced goods or services. The price wars may accelerate “kicking” some small and weak competitors out of the market with a big loss in profit margin. However, it can’t “kill” equal-strength competitors. That is why there is no winner in price wars. As per the textbook, “The point of tit-for-tat is to deliver a limited punishment for defections from cooperation. If the competitor cuts the price in one period, the firm cuts its price next period. But if and when the competitor returns to a high price, the firm returns to high prices, too”. It only happens for a cooperative high-price equilibrium. The tit-for-tat strategy requires never the first to defect, retaliatory immediately, and forgiving. It is for the long run and hard to follow for all competitors. A company may wait to find reasons immediately when its sales drop down. It also needs time to plan and implement punishment actions. When the first defector raises its price, it may then fund other competitors still keep the low price. And then, it has to join the price war. It may cause the price war never to end.  Who has more to lose in a price war between Beat and Spotify? How will this impact their pricing strategies? Explain . Spotify, on the other hand, is a loss-making business that is attempting to expand its path to profitability. Slashing rates will make that aim more difficult, but with Apple getting more involved in streaming as well as Google working on a music-focused video-sharing site, asking $9.99 may not have been an option for much longer. Spotify's contract is only good until June 15; however, the business may face increasing pressure to match Beats' price indefinitely. Beats will gain from tighter integration with Apple's devices and access to the tech giant's perpetually deep pockets, even if Spotify is the obvious leader in the industry with 10 million paying subscribers. The firm's billion-dollar luxury headphone sector also generates high-margin earnings. "Spotify may still win without price wars depending on its users' loyalty through improving user experience" It is interesting when I can easily google Spotify music （ $10.99/month ） , but not beats. It is still alive. :). It also gets support from MS, cooperates with ESPN and Netflix , as well as with Games companies. In the real world, Spotify looks to win in the music market.  In the case of Amazon, Google, and Microsoft, the price war in cloud computing may be a necessary evil. Explain.

Lowering prices makes cloud services more affordable, encouraging more businesses to adopt them, and leading to market expansion. This competition also drives innovation, as providers strive to enhance their services and reduce costs. Reducing profit margins may all be temporary; however, their long-term goal is to gain a larger market share and remain competitive in an industry that values scale and innovation. Spotify - Wikipedia https://en.wikipedia.org/wiki/ESPN https://en.wikipedia.org/wiki/Netflix

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