Using this illustration along with the game theory concepts, please analyze the

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Using this illustration along with the game theory concepts, please analyze the four tactics listed to avoid price wars. Please explain using the Nash equilibrium, capacity expansion, and the game theory in a 500 word typed response.

LLUSTRATION 13.3 How to Avoid Price Wars and Stay .Adopt a policy of price matching and advertise it so that your rivals believe your commitment to matching price cuts cannot (easily) be reversed If rivals expect you to match price cuts, they are less likely to start a price war. And, if they expect When a rival firm cuts its price, a manager's best strate- gic response, in many cases, is to retaliate with a price cut of its own. Successive repetitions of price cutting, frequently referred to as "price wars," can result in all firms doing worse than if they had not entered a price war. As we showed you in this chapter, if managers can find a way to cooperate in setting their prices, they can avoid getting into a low-price, low-profit situation ey are more likely to expect you to cooperate by following their price ncreases Make sure your competitors know you have low variable costs. Recall that firms only stop selling and shut down when price falls below average ?? ro wa zation an markets have made markets more competitive, pr wars have become more common. Indeed, price wars are so common now that most managers will face a price war sometime in their careers war if they believe you have low variable costs In practice, it can be difficult to convince rivals that your variable costs are low, since rivals may believe you are providing them with false information about your costs to keep them from cutting price Price wars leave oligopoly firms in situations like the noncooperative Nash cell D in the prisoners dilemmas we have discussed in this chapter and the last chapter. Price wars can be avoided, just as cell D can be avo we to coordinate prices, called "collusion" and "price- fixing," are pe States, and many other countries, especially in Europe are outlawing price-fixing. Tacit collusion-agreement without explicit communication-is also illegal but is more difficult to discover and prove. As we mentioned - Don't retaliate with a price cut of your own if you can maintain sales by increasing product or service quality. In those market segments where customers are particularly quality conscious, you may be able to hold on to customers, even though rivals' prices are lower, if consumers strongly demand quality products or services. When consumers view price as a measure of product quality, price-cutting may do permanent damage to a firm's reputation for high quality Generally try to communicate to rivals that you prefer to compete in nonprice ways. Non- price competition involves differentiating your rms can find wa As times, explicit arrangements na ce-fixing in the Uni States can be quite severe. In addition to facing st fines, business executives can and do go to prison fo eep crime of price-fixin duct from rivals produ ima ere is the problem ce wars: Retaliator price-cutting can lead to costly price wars, but at These are a few of the practical (and legal) methods avoiding price wars that are discussed in the article by Rao, Bergen, and Davis. While we agree with these au What can managers do, that won't land them in attempted price-fixing, to avoid being drawn rs avoiding into price wars? In a recent article in Harvard Business Review, Akshay Rao, Mark Bergen, and Scott Davis pr vice on how to avoid price wars and, when they can not be avoided, how to fight them successfully We Akshay R. Rao, Mark E. Berg will briefly discuss several of their tactics for avoiding Fight a Price War," Harvard Business Review, March-April price wars profitable policy, we must admit that, as consumers, we rather like price wars. Our advice to you, nonethe- less, is to avoid price wars but don't go to jail trying! ide business executives with some practical ad en, and Scott Davis, "How to 2000, pp. 107-16

Explanation / Answer

As one of the critical concepts of Game Theory,Nash Equilibrium denotes a non-cooperative game or rivalry involving multiple players where respective players are informed of each player's equilibrium or optimal strategy and has no particulr incentive to change their own strategies.The equilibrium or the optimal condition under Nash equilibrium essentially implies that all the players involved in the game have chosen the best possible strategy based on the their information about their rival's best strategies.Since,every player is choosing the best possible strategy given the best strategies of the other players under the constrained circumstances,it is usually considered as the optimal or equilibrium outcome in game theory under Industrial Economics.

Now,in all of these four tactics to combat or avoid price competition or war between rival firms,notice that the individual firms are initially providing information or signals on their respective business/ecpnomic strategies to other firms.In the first instance,it has been recommended that firms advertise their intentions of price matching(either price cuts or hike) and accordingly the rival firms would choose the best possible strategy that would benefit them the most economically.In the second case,providing information about variable cost structure of the individual firms would indicate any potential possibility in favor or against price cutting.As no firm would prefer to cut prices beacuse it is not at all a desirable outcome for any firm.Hence,providing accurate information about the variable cost situation of the individual firms could expectedly avoid any potential price war among the rival firms and establish Nash Equilibrium as it is certainly not in the best interest of any firm to engage in any kind of persistent price competition as it might lead to profit reduction and even loss for firms in some instances.In the thrid instance,observe that it is relatively better to retaliate to the price cut initiated by any rival firm by adopting non-price related strategies such as increasing production or improving product quality to enhance sales revenue instead of enforcing a price cut as well which could potentially hurt the firm.In this way the firms can ensure customer retention and even ehance existing customer base through quality improvement and product diversity which is practically a better option than adopting a price cut as a retaliatory option.Thus,it can be stated that the optimal strategy of the firm in this case,is to consider other non-price cut related retaliatory strategy (against the price cut of the rival firm) that would lead to higher revenue generation and profit level still maintaining the market competition.Similarly,in the fourth case,the authors of the article suggests non-price competition among firms as the better option compared to repetitive price cuts as a retaliatory strategy.This possibly includes product differentiation,various promotional and advertising strategies,quality differentiation and so forth.Thus,these alternatives and recommendations highlighted in all the four tactics essentially provides a bigger range of option for the firms on how to effectively retaliate to the rival firm's business strategy and in the process,assist them to figure out the best possible option for the respective firms with information on the best possible strategy adopted by the rival firms under a non-cooperative market competition.Hence,it could potentially lead towards a Nash equilibrium optimal outcome where all the firms could economically benefit in the best possible way or the most optimal way and no firm would be actually worse off.The alternatives emphasized in the four tactics would also ward off the possibilities of any "illegal collusion" or oligopolistic outcome in the market thereby sustaining non-cooperative market competition benefitting consumers.

Furthermore,notice that as indirectly implied by the some of the given tactics,non-price business strategies can sometimes lead to capacity expansion for firms in future.For example,taking advantage of consistently low variable cost can lead to long term of economies of scale for the firm thereby enhancing the productive capacity and sales expansion in the future.This would have a positive impact on the long term profit level and in this regard,price stability in the market would further facilitate the firms in such capacity enhancement.Additionally,firms can invest on launching new products and increasing product variety in the market thereby enhancing non-price competition which can improve the sales performance of the firms by tapping into new customer base and expanding market share.Now,this could perhaps increase the advertising and marketing cost/expenses of the firms but could immensely contribute to capacity expansion and market share augmentation which could discourage competitors from adopting capacity building and creates a barrier for the new firms to enter the market.Therefore,an effective capacity expansion strategy can evidently increase the market power of the individual firms which is obviously a desirable outcome for any firm under non-cooperative market competition rather than implementing repititive price cuts just for the sake of ensuring a temporary safeguard against the pricing strategy of the rival firms without having much profound and long term business or economic vision.

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