Competition Game Pricing

Competitive pricing is the method of determining the price of a product based on what the market’s competing player is charging. It is typically applicable to companies that operate in the same market and hence trade in related goods. Various ideas aim to justify how industry rivals can determine retail rates. According to the non-zero-sum games theory, no one pricing strategy is attractive to all rivals (Moulin, 2014). In order to provide a potential alternative, the paper would analyze the pricing completion games in Bertrand Ltd and Cournot Ltd. When two businesses are competing in the industry, they must come up with pricing competition strategies that allow them to have win-win situations. In this regard, they should set prices of their commodities that make them better off (McCain, 2014). The profits of each company are based on the price of its competitor.

Cournot Ltd

Bertrand Ltd

High Price

Low Price

High Price

(10,10)

(1,15)

Low Price

(15,1)

(4,4)

Based on the table above, Cournot Ltd can earn the higher profits than Bertrand Ltd if its prices are lower than its competitor is. Conversely, its profits reduce if its prices are higher than that of Bertrand Ltd. Both firms earn high profits when they charge higher price and moderately low profits when both set the low price to their commodities (McCain, 2014).

The case can be explained using the non-zero-sum game theory. Precisely, according to this theory, the profits of two businesses in the same industry are inversely associated because increase in prices of one commodity cause reduction its profits and vice versa to its rival. In fact, Cournot Ltd only gains higher profits if Bertrand fails to charge the right price. Moreover, the interests of each business overlap entirely (Moulin, 2014). Similarly, the theory proposes that one rival’s gain does not necessarily mean bad performance in the other.

According to non-zero sum theory, the competition between Bertrand Ltd and Cournot Ltd proposes that there is no collectively approved solution to price setting. Therefore, there is not perfect ideal approach that is desirable to every player in the market (McCain, 2014). Therefore, they should seek to reach an equilibrium price where they can acquire maximum profits in a win-win situation. Furthermore, the theory also does not recommend stern price competition between the players in the market. In fact, it tries to advocate for both cooperative and competitive strategies in order to arrive at the mid-ground (Moulin, 2014). Business should participate in a non-zero sum competition since they have corresponding interests. In so doing, they should always try to arrive at a win-win situation, which would play a significant part in gaining reasonable profits in both businesses.

Conclusion

Bertrand Ltd and Cournot Ltd should strive to both cooperate and compete rather than taking completely independent choices. While Bertrand Ltd prefers higher prices, it would consider its rival’s prices, rather than determining the prices alone (Williams, 2013). The same case applies to Cournot Ltd. From the table above, the non-zero sum calls for non-severely competitive pricing. The mutual interest between the Bertrand Ltd and Cournot Ltd is that they would both desire to cooperate that to set prices separately (Williams, 2013). Nonetheless, they have opposing interests because they both desire to gain higher profits than their competitor does. Therefore, focusing on their collective interests would assist in gaining setting competitive pricing.

References

Moulin, H. (2014). Cooperative microeconomics: a game-theoretic introduction. Princeton University Press.

McCain, R. A. (2014). Game theory: A nontechnical introduction to the analysis of strategy. World Scientific Publishing Co Inc.

Williams, K. (2013). Introduction to Game Theory: A Behavioral Approach: International Edition. OUP Catalogue.