Discussion board postings.
Respond to your classmates
1. A game is a situation in which two or more players choose strategies to compete for a reward or payoff of some kind. In mutual-dependence-recognized (MDR) oligopoly the game is producing and selling a similar product, the strategy is (letâ€™s say) advertising expenditures, andthe payoff is market share and the profit associated with that market share (Douglas, 2012). In the case of GE trying to deter Maytag from entering the market, GE would like to spend more advertising dollars to deter Maytag’s participation in the market. If GE decides to put another $2m in advertising then the payoff yield associated with that would be as follows; $30m/$12m= $2.5m in payoff for every $1m in advertising so if GE uses $14m in advertising the payoff should be $35m-$1.5m= $33.5m payoff return if advertising is increased and Maytag stays out of the market. If Maytag chooses to enter the market but does not increase their advertising budget and GE still chooses to then the added payoff of GE raising their advertising budget would be as follows; $20m/$12m= $1.67m as the same applies her as it did previously then the expected payoff from increasing the advertising budget would be $23.34-$1.5m= $21.84m. If Maytag decides to stay out of the market then the extra advertising money would be worth the risks associated with that investment in order to potentially corner the market by keeping a rival company out of it. By spending the extra in advertising there is a great deal of potential to keep Maytag’s profits at or below $0 on this product.
Although if both GE and Maytag decided to raise advertising budgets in order to compete with one another, then the payoffs would be in competition with each other. Although it would cost Maytag a lot more money in advertising to compete with GE in this market according to the matrix purposed in order for good return on rate of investment. In the end it would not be cost efficient for Maytag to compete with GE in this case as they would end up spending far more money than expected payoff for the product that is being compared in this case.
The equilibrium in this case would then be for GE to spend the extra in advertising in order to gain payoff return to keep Maytag out of the market. As equilibrium is defined as the point in a game where both players have made their decisions and an outcome is reached (McNulty, 2014). And the decision here is for Maytag to concede and stay out of a market that it would cost to much to be in and let the competition company shoulder the expenses of producing and maintaining market control.
Douglas, E. (2012). Managerial Economics (1st ed.). San Diego, CA: Bridgepoint Education.
McNulty, D. (2014). “The Basics of Game Theory”. Retrieved from: http://www.investopedia.com/articles/financial-theory/08/game-theory-basics.asp
2. As presented, this problem is one that exemplifies a mutual-dependence-recognized oligopoly in a zero-sum game (Douglas, 2012). The ultimate goal for any business is to corner the market in their industry, or to prevent oneâ€™s competitor from even entering the market. Hence, this business situation is a zero-sum game which denotes that where one gains market share the other loses market share, thereby shifting the demand curve to the right (Douglas, 2012).
In this case, strategically, Maytag should enter the market, which is its dominant strategy, as it will gain $1m and $12m (versus $0) depending on GEâ€™s advertising budget. GE, on the other hand, loses profit if Maytag enters the market as its profit is reduced to $20m and $15m depending on GEâ€™s advertising budget so it does not have a dominant strategy in the zero sum game. GE can successfully prevent Maytag from entering the market by increasing its advertising levels because the more it increases its advertising levels the less likely Maytag will view entering the market as profitable in that GE can corner the market. In this zero-sum game, there does not appear to be any equilibrium point given the factors in this problem.
It is more likely than not that the expenditure of an additional $2m will deter Maytag from entering the market as GEâ€™s profits continue to rise and the demand curve continues to shift to the right, even though at a slower pace than if Maytag did not enter the market. In order to maximize profits, GE should strategically pursue this strategy as this is not a perfectly competitive marketplace (Douglas, 2012).
Douglas, E. (2012). Managerial economics. (1st ed.). San Diego, CA: Bridgepoint Education.
3.In regards to the GE and Maytag situation presented to us for discussion, it is my belief that the additional spending on advertisement would not achieve the effect of deterring Maytag from entering. The reason behind this thought is the fact that when the game theory in consideration, Maytag has a strategic advantage. Our textbook informs us â€œa game is a situation in which two or more players choose strategies to compete for a reward or payoff of some kind. In mutual-dependence-recognized (MDR) oligopoly the game is producing and selling a similar product, the strategy is (letâ€™s say) advertising expenditures, and the payoff is market share and the profit associated with that market shareâ€ (Douglas, 2012). First, if Maytag does not enter the market then the market will be monopolized for GE to gain all the profit. I am sure that we can all agree that would not be a wise idea for Maytag to let that happen since dryers are one of Maytagâ€™s main products. That fact alone makes it a risk for Maytag to gain additional profits if they do not enter the market. On the other hand, based on the information that was given to us via the table, we can see that if Maytag enters the market they will have dominant strategy in GEâ€™s advertising budget of 12 million versus Maytagâ€™s 1 million budget. Therefore, Maytagâ€™s return is greater. However, they will not have dominant strategy against GEâ€™s advertising budget of 0.7 million versus Maytagâ€™s 12 million budget. Because of that, GEâ€™s return will be higher and more profitable. It is to that end that increasing the advertising levels may not be the wisest decision for GE. They seem to gain more with a lower advertising budget.
Douglas, E. (2012). Managerial Economics (1st ed.). San Diego, CA: Bridgepoint Education
When a company chooses to use the low-cost strategy in order to keep competition out, they are basically ensuring that their prices are lower than the competitor is able to offer. When a company decides to offer lower costs it builds brand loyalty and ensures that their customers will keep coming back. This is apparent when it comes to Walmart. They offer lower prices than Target so many people tend to be loyal to them because of it.
A company can choose a different strategy to keep competitors out, such as having pricing power. These companies have gained the dominant position in their market and have the ability to set their own prices. Pricing power can also go hand-in-hand with powerful brands. Companies that have a great reputation and are very powerful in their markets are said to be powerful brands. This would be companies such as Apple. It would take a lot to destroy a company with this much staying power.
Another way to gain the competitive advantage is to offer product differentiation. Having a unique product that is exclusive to your company is a way to ensure people will notice you. This will gain customer loyalty. A good example of this would have been when the Samsung Galaxy offered a lot of unique features that iPhones did not. Product lines must also always be able to evolve into what people need and wanting in the moment. Product lines cannot stay stagnant, or the company will eventually fade away.
Lastly, we cannot forget about the value in basic customer service. People want to be treated well, and they are going to go with whatever company is going to treat them the best. Nothing will make a company lose business more quickly than having a customer service team that does not care about you or your needs and feelings at all.
5.Firm’s that choose the low-cost strategy are looking to widen contribution margins by reducing the cost per unit (Douglas, 2012). There are many firms that try and do this in order to entice customers into coming and buying those products over others in other competing stores. For example we all know that Walmart is the leader in the low-cost store and that is why so many people shop their is that their low prices have boosted customer retention and loyalty so high that other stores cannot keep up with extreme low prices for almost all goods you can purchase here. Home Depot and Lowe’s are other examples of the low-cost stores that compete with extreme low prices in order to gain the most customers through their doors as opposed to them shopping at the competition. A great way in which Walmart uses its low-cost pricing to retain customers is with it super centers and the price of food, and in another part of the store with their electronics, that may be marked up considerable higher in a store like Best Buy for the same product.
A differentiating firm
â€ (Douglas, 2012). A common example of this are the off brand products. For example there are the name brands of cereal, but then there is the â€œstore brandâ€ cereals. They taste very similar and in many cases look similar but they are a much cheaper price.
â€œThus, a differentiation strategy means trying to make a product or service that is of higher quality in the eyes of the target customer, such that the customer is willing to pay a higher price for itâ€ (Douglas, 2012). Using the same example of the store brand versus the brand name it is also very common to see this among over the counter medication. An example of this is the CVS brand of Diphenhydramine versus Benadryl. Essentially they are the same basic medication, however it is going to be the job of Benadryl to convince consumers that their brand is worth the extra money to buy their product versus the cheaper CVS brand. Benadryl can do this by focusing their advertising on the fact that they have been the trusted name for allergy relief much longer then the not brand names. This reminds people that as the name brand they are the original and have been around longer.
Another way to try and bring in consumers is through product differentiation going back to the Benadryl example would be the introduction the new tongue strips that dissolve on the tongue. It is a new way for the medication to get into the blood system for fast relief. But this is good for people who are no good at taking pills.
Douglas, E. (2012). Managerial Economics (1st ed.). San Diego, CA: Bridgepoint Education