Game Theory
Chapter 15 explicitly discusses the theme behind the game theory. Please discuss the principles associated with this theory, as well as, how the classical game theory can be contained. Does the game theory in your opinion support the corporate’s strategy? When should the prisoner dilemma be used? Include a minimum of one reference.
On the island of Bermuda, the Cooper & Sons chain of department stores has been in the same family since 1897. Its largest rival, Gibbons, has been in the hands of another family for nearly as long. Yet, a decade ago, business began to slip. Increasing competition from Internet retailers led revenues to decline by 30% in just a few years. Several competing department stores have shut their doors.
In 2012, competition for the remaining dollars had become fierce. Cooper lowered its prices to try to steal some of Gibbons’ customers. Gibbons responded with price cuts of its own. Then Cooper cut prices even more and expanded its store hours.
Short of starting a land war in Asia, few moves are as dumb as starting a price war with a close competitor. Each firm mistakenly believes that it can somehow “win” the war. When this doesn’t happen, they find themselves with low profits, consumers who have grown accustomed to low prices, and the problem of how to end hostilities.
In October 2012, Gibbons announced that it would not be undercut. On its face, the announcement—“If you find a better price, we’ll match it”—seemed to promise even lower prices, but in fact, it ended the war. Cooper no longer had an incentive to undercut Gibbons’ prices because it couldn’t gain customers by doing so. Gibbons’ customers would stay with Gibbons and demand a price match instead. Quite counterintuitively, a price-matching announcement can end a price war.
In this chapter, we show you how to use game theory to analyze situations like these, where the profit of one firm depends critically on the actions of others. Studying game theory will give you insight into not only where competition with rivals is likely to lead, but also how to change the rules of the game to your advantage.