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    1) The document describes a game that will be played in class called the Dynamic Pricing Game. It involves two firms competing for 100 customers by choosing whether to create loyal customers and then setting prices. 2) The game has a Loyalty Stage where firms can pay $250 to guarantee 30 loyal customers, followed by a Pricing Stage where firms take turns lowering the price from $50 down to $10, with the goal of maximizing their own profits. 3) Students are asked to consider how they would respond in two scenarios: if they had loyal customers but were undercut to $40, and if neither firm had loyal customers and they won the coin flip to set

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    1) The document describes a game that will be played in class called the Dynamic Pricing Game. It involves two firms competing for 100 customers by choosing whether to create loyal customers and then setting prices. 2) The game has a Loyalty Stage where firms can pay $250 to guarantee 30 loyal customers, followed by a Pricing Stage where firms take turns lowering the price from $50 down to $10, with the goal of maximizing their own profits. 3) Students are asked to consider how they would respond in two scenarios: if they had loyal customers but were undercut to $40, and if neither firm had loyal customers and they won the coin flip to set

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    10 views2 pages

    Lec6 Price Game

    Uploaded by

    Ammar Karampurwala
    1) The document describes a game that will be played in class called the Dynamic Pricing Game. It involves two firms competing for 100 customers by choosing whether to create loyal customers and then setting prices. 2) The game has a Loyalty Stage where firms can pay $250 to guarantee 30 loyal customers, followed by a Pricing Stage where firms take turns lowering the price from $50 down to $10, with the goal of maximizing their own profits. 3) Students are asked to consider how they would respond in two scenarios: if they had loyal customers but were undercut to $40, and if neither firm had loyal customers and they won the coin flip to set

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
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    Download as pdf or txt
    of 2

    15.

    040 Game Theory for Managers

    Professor David McAdams

    Dynamic Pricing Game

    We will play the Dynamic Pricing Game next class. As preparation, please think about the game, answer the questions on the opposite side, and turn in this sheet to the TA at the beginning of next lecture.

    Description of Dynamic Price War:


    There are 100 customers and two firms. Loyalty Stage: Each firm decides whether to create a loyal customer case. At a cost of $250, each firm can guarantee that 30 customers will definitely buy its product regardless of the prices. Pricing Stage: Coin-flip determines which firm goes first. Both firms start with tentative price equal to $50. To keep things simple, firms are only allowed to set price equal to $50, $40, $30, $20, or $10. The Pricing Stage ends as soon as both firms have had a move and someone announces No Change. If prices stay $50 for both firms, each firm splits the market, selling 50 each If one firm ends up with a lower price, then the low-priced firm gets all customers who are not loyal to the high-price firm (either 100 or 70) while the high-price firm only sells to its loyal customers (0 or 30) If both firms end up with the same price, less than $50, then whoever was first to set that price gets all customers who arent loyal to the other firm (100 or 70) while that firm only sells to its loyal customers (0 or 30) Payoffs in the Game. Each firm wants to maximize its own profit = revenue minus its cost for loyalty (either $0 or $250) firms have no other costs. Example of play. (This example is not intended to illustrate good or bad play.) In Loyalty Stage, firm A creates loyalty while firm B does not. In Pricing Stage, Firm B wins the coin flip. It stays at $50. Firm A then lowers its price to $30. Firm B then lowers its price to $20. Firm A then stays at $30 ending the game. Firm As profit is 30*$30 - $250 = $650. Firm Bs profit is 70*$20 - $0 = $1400.

    15.040 Game Theory for Managers

    Professor David McAdams

    How would you play?


    What would you do in the following two situations? Please briefly explain your answers. 1. You have invested in Loyal customers, but the other firm has not. They win the coin flip and decide to undercut you with price $40. How would you respond? Why?

    2. Neither you nor your opponent has invested in Loyal customers. You win the coin flip. Do you stay at $50 or undercut? If undercut, what price? Why?

    3. Which do you plan to do: invest in Loyal customers or not?

    Your Name: __________________________

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