Applying Game Theory to Pricing Strategy

Scenario

Imagine that you own a pharmacy in your area. One of your competitors launches a “We will not be undersold” campaign, which promises consumers 150 % of any difference between its prices and the advertised prices of other pharmacies. Evaluate the social issues in your community as well as the economic culture that is influencing this type of pricing competition. Develop and describe a microeconomic model that is responsive to the service demands of your market. Based on your conclusions, how would you react to this situation and with what business strategy would you approach this? How might you apply game theory to the creation of your strategy? Please get this order back to me on time because it is already late, thank you.

 

Sample Answer

Applying Game Theory to Pricing Strategy

From the provided case study, one can conclude that the said community comprises of low-income earners or middle-income earners. Such earners are likely to drive pricing wars to get specific business. Notably, presently, those consuming healthcare are facing economic challenges. In the community, many of them remain oblivious to the information required to formulate favorable choices. They are forced to make decisions by their hard economic circumstances rather than the choice to make favorable decisions. They exhibit consumer ignorance that can be deemed rational in relation to healthcare. They come off as unable to make out bad advice from advice that is useful. They come off as likely to ignore all they advice they access. There is a high likelihood that those unable to make out reliable advice from unreliable advice will elect to miss out care.

I would respond to such a situation by gathering information on the principal concepts that assist individuals when engaging in non-cooperative games. The concepts include knowing own options, knowing the options available to rivals, knowing the rivals’ motivations, predicting how rivals will react to specific interventions or market changes, and impacting on rivals’ reactions. Once I get answers to the concepts, I would formulate a microeconomic model capable of responding to my market’s service demands. I would appraise the levels of profits that I would draw from underselling products by 150% and related logics.

I would employ the game theory in the development of own strategy by focusing on relevant equilibria or solution concepts. I would assume that my rivals would act logically or rationally. Particularly, I would focus on the Nash solution concept (Gibbons, 1992). The concept would help in developing a strategy that would represent, or embody, a best reaction to alternative strategies.

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