Marketing strategy
Sample Solution
Newspaper Pricing Game Analysis
- Tampa Tribune's dominant strategy: It has no dominant strategy (explained below).
- St. Petersburg Times' dominant strategy: It has no dominant strategy (explained below).
- Tampa Tribune's dominated strategy: It has no dominated strategy (explained below).
- St. Petersburg Times' dominated strategy: It has no dominated strategy (explained below).
Full Answer Section
Explanation:
In a dominant strategy game, a player has one strategy that is better than all other strategies regardless of what the other player chooses. In this scenario, both newspapers have two options (low price or high price). Neither newspaper has a single best choice that dominates the other option in all situations. For example, if the Tampa Tribune sets a low price, the best response for the St. Petersburg Times depends on their profit margins at each price point. There's no single universally dominant strategy.
This game is also not a Prisoner's Dilemma because there's no scenario where mutual cooperation leads to a worse outcome for both players compared to unilateral cheating.
Nash Equilibrium:
- A Nash Equilibrium occurs when both players choose their best response strategy given the other player's chosen strategy. Here, there are multiple Nash Equilibria:
- (Low Price, Low Price): Both earn lower profits but avoid the risk of losing even more if one charges high while the other charges low.
- (High Price, High Price): Both earn higher profits than with low prices, but less than if one charged high while the other charged low (which wouldn't be a Nash Equilibrium because the low price player would have an incentive to deviate).
Dominant Strategy Equilibrium?
None of the Nash Equilibria are Dominant Strategy Equilibria because, as explained earlier, neither player has a single dominant strategy.
Strategic Stability:
- There are no strategically stable equilibria in this game. This is because each player has an incentive to deviate from the low price-low price equilibrium if they believe the other player will stick to it (potentially earning higher profits by charging high). Similarly, for the high price-high price equilibrium, there's an incentive to deviate if they believe the other player will (potentially earning higher profits by charging low).
Duopolists' Pricing Game (Alcoa & Kaiser)
Cheating vs. Cooperation:
Present Value (PV) Calculations: We'll assume a discount rate of r for simplicity.
- Monthly gain from cheating for Kaiser: $10 million (High price for Kaiser, Low price for Alcoa) - $5 million (Low price for Kaiser, Low price for Alcoa) = $5 million.
Present value of benefit from cheating for two months: $5 million/(1+r) + $5 million/(1+r)^2
- Monthly cost of punishment for Kaiser: $2 million (Low price for Kaiser, High price for Alcoa) - $8 million (High price for Kaiser, High price for Alcoa) = -$6 million (negative because it's a cost).
Present value of cost of cheating for two months of punishment: -$6 million/(1+r) - $6 million/(1+r)^2
- Will Kaiser cooperate or cheat?
The answer depends on the discount rate (r). If the discount rate is low (meaning Kaiser highly values immediate gains), then the present value of the benefit from cheating for two months might outweigh the present value of the cost of punishment. In this case, Kaiser might cheat.
However, if the discount rate is high (meaning Kaiser places more weight on future benefits), then the present value of the cost of punishment might outweigh the short-term gain from cheating. In this scenario, Kaiser would likely cooperate to avoid future punishment and maintain a long-term profitable relationship.
Two-Part Pricing for Golf Course
- A two-part pricing plan can be a good option for a golf course, depending on the specific circumstances. Here's why:
- Increased Revenue: A two-part pricing plan can potentially generate more revenue than a uniform price. This can be achieved by charging a fixed fee (e.g., green fee) for access to the course and then charging a variable fee (e.g., per-round fee) for playing. This allows you to capture revenue from golfers who may not play frequently but are willing to pay a lower access fee.
- Targeting Different Customers: A two-part pricing plan allows you to cater to different customer segments. For example, you could offer lower per-round fees for weekday play to attract golfers who wouldn't play during peak hours.