Week 5 is a continuation of our discussions on market structures; however, we will also transition to a discussion on pricing strategies.
The most important characteristic in an oligopoly market structure is that there are only a small number of firms competing, and as such their behavior is mutually interdependent. In perfect competition and monopolistic competition each firm does not need to consider the behavior of the others because there are so many of them. How managers respond to the strategies of other firms in an oligopoly is critical to whether or not they can successfully compete. To test or predict how strategies affect the interdependence several models have been developed. One of those models is referred to as the Game Theory. This is a mathematical tool designed to analyze outcomes when players employ different strategies, i.e., cooperate or compete. The best known game theory is Prisoners Dilemma.
1 – Visit the Prisoner’s Dilemma site ( https://serendipstudio.org/playground/pd.html ) and play Prisoners Dilemma at least twice, changing your strategy between attempts. Then, post your responses and explain how you think this strategy game helps managers make pricing decisions.
The differences in demand and elasticity are the primary factors that drive management decisions related to pricing strategies. One strategy that is prevalent in the U.S. markets is price discrimination. This practice charges a different price to different target groups without consideration of the differences in the costs of production, i.e., senior citizens receive discounted prices at movie theatres while those consumers under 65 pay the full price.
2 – Identify an industry or a company that practices price discrimination, then described the pricing strategy and finish by stating why you consider this an effective pricing strategy for the company or the industry.