Please organize the results into an appropriate game theory form, and figure out what if any equilibrium will result. Memo 7 To: Pricing Manager, Central State Region From: Vice President, Marketing Re: Strategic Pricing Decision Our only competitor in the Central State region currently provides bundled services at $79.95. We are currently charging a 10 percent premium over its price, but there are rumors that it is contemplating a 10 percent price increase to bring its price in line with ours. We don’t know its cost structure, so we don’t know whether its price increase is driven by rising costs or a strategic move to gain margin. Historically, when we both charge the same price, our market share is about 65 percent. When we charge a 10 percent premium over its price, our market share declines to about 60 percent. It appears that in those instances when it charges a 10 percent higher price than us, our market share is about 70 percent. Please provide a recommendation regarding whether we should maintain our current price or reduce our price to $79.95. Please factor into your recommendation that we pay programming fees that amount to $49.50 per subscriber. In addition, maintenance, service, and billing costs are about $6.50 per subscriber. At present, there are 110,000 households in the relevant market.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Please organize the results into an appropriate game theory form, and figure out what if any equilibrium will result.

Memo 7

To: Pricing Manager, Central State Region

From: Vice President, Marketing

Re: Strategic Pricing Decision

Our only competitor in the Central State region currently provides bundled services at $79.95. We are currently charging a 10 percent premium over its price, but there are rumors that it is contemplating a 10 percent price increase to bring its price in line with ours. We don’t know its cost structure, so we don’t know whether its price increase is driven by rising costs or a strategic move to gain margin. Historically, when we both charge the same price, our market share is about 65 percent. When we charge a 10 percent premium over its price, our market share declines to about 60 percent. It appears that in those instances when it charges a 10 percent higher price than us, our market share is about 70 percent.

Please provide a recommendation regarding whether we should maintain our current price or reduce our price to $79.95. Please factor into your recommendation that we pay programming fees that amount to $49.50 per subscriber. In addition, maintenance, service, and billing costs are about $6.50 per subscriber. At present, there are 110,000 households in the relevant market.

Definition Definition Economic decision-making framework that analyzes how different players optimize their outcomes with given pay-offs corresponding to their available strategies. The assumptions of game theory are: The number of players or competitors are finite/limited; All participants are rational The rules of the game are known to every player; and Each participant has a finite set of actions. A common way in which game theory is presented as an ( m x n ) matrix in which m represents the strategies of row player and n represents the strategies of column player. There are several limitations of game theory: Many businesses have a large number of competitors, and selecting an optimal strategy in these circumstances is difficult; Real-life business operating environments are full of uncertainty and difficult to model as a game theory; and The assumption of rationality and utility maximization isn't always an accurate portrayal of human nature.

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