strategy I problem set
Problem Set 2 – Strategy I
1. Why do price misreads (or more generally the inability to observe prices with precision) encourage firms to lower prices? [Note: assume all prices are subject to misreads.]
Misreads occur when a firm are competing with no information about competitors and assumes that competitors have taken an uncooperative pricing action when in fact they are cooperative.
This assumption makes the firm react in an uncooperative manner, lowering the price. This asymmetric information can then lead both firms use tit-for-tat pricing strategy what makes the competing firm respond to the initial reactionary firm in an uncooperative manner as well and lead a price war. A price war usually occurs when a firm believes that price-cutting produces increased market share, but truly does not have a cost advantage. Typically, price wars are overreactions to threats that either aren 't there at all or are not as big as they seem. So, price wars inevitably cause firms to considerably lower prices.
2. It is often argued that price wars may be more likely to occur during low-demand periods than high-demand periods. Are there factors that might reverse this implication? That is, can you think of reasons why the attractiveness of deviating from cooperative pricing might actually be greater during booms (high-demand) than during busts (low-demand)?
To reverse this implication where price wars happen during low-demands, we can explore the fact that in high demand there is a better opportunity to bring new customers to the firm, since in economic booms there will usually enter more new first time customers in the market. So, and as the price is a very attractive characteristic to bring more new customers, firms should play with this and take advantage to increase their long term market share and long term profitability. Since in high demand period is more economic favorable charging a lower price to attract this new costumers that certainly will became a loyal
1. Why do price misreads (or more generally the inability to observe prices with precision) encourage firms to lower prices? [Note: assume all prices are subject to misreads.]
Misreads occur when a firm are competing with no information about competitors and assumes that competitors have taken an uncooperative pricing action when in fact they are cooperative.
This assumption makes the firm react in an uncooperative manner, lowering the price. This asymmetric information can then lead both firms use tit-for-tat pricing strategy what makes the competing firm respond to the initial reactionary firm in an uncooperative manner as well and lead a price war. A price war usually occurs when a firm believes that price-cutting produces increased market share, but truly does not have a cost advantage. Typically, price wars are overreactions to threats that either aren 't there at all or are not as big as they seem. So, price wars inevitably cause firms to considerably lower prices.
2. It is often argued that price wars may be more likely to occur during low-demand periods than high-demand periods. Are there factors that might reverse this implication? That is, can you think of reasons why the attractiveness of deviating from cooperative pricing might actually be greater during booms (high-demand) than during busts (low-demand)?
To reverse this implication where price wars happen during low-demands, we can explore the fact that in high demand there is a better opportunity to bring new customers to the firm, since in economic booms there will usually enter more new first time customers in the market. So, and as the price is a very attractive characteristic to bring more new customers, firms should play with this and take advantage to increase their long term market share and long term profitability. Since in high demand period is more economic favorable charging a lower price to attract this new costumers that certainly will became a loyal