Application of Game of Theory

in the E-commerce market of

India
Managerial Economics Project
TABLE OF CONTENTS
01 Motivation

02 Objectives and Microeconomic frameworks used

03 Data and Analysis

04 Conclusion & Interpretation of results

 Motivation
The Indian E-commerce market is overwhelmed with many online shopping platforms with Amazon &
Flipkart capture more than 60% of the market.

As both share homogenous products to a similar target audience, they aim at gaining more market share
by:
 Price wars-offering lower prices
 Price Matching- offering reduced prices as the competitor & innovation strategies

Due to high market concentration, this scenario closely represents Oligopoly as a decision taken by one
major firm will impact everyone in the industry.
 Objectives and Frameworks

Objective Frameworks used

Study the pricing, customer loyalty due  Oligopoly
to innovation, and the first-mover  Prisoner's Dilemma
advantage in terms of Game Theory  Game of chicken
models. For the scope of this report, we  Bertrand competition
would study the pricing strategy of  Stackelberg Game
Amazon and Flipkart.
 Amazon vs Flipkart
Both the companies
have a combined
market share of 60%

• Incorporated in 1994, by Jeff Bezos • Founded by Sachin Bansal and

• launched with a large category of Binny Bansal
products in India in 2013 • Introduced Cash on
• Introduced “one – day delivery” in Delivery(COD)
India • Acquired by Walmart in 2018
 Data and Analysis
Competition Strategy:
A strategy devised by firm to create and maintain a competitive advantage w.r.t its
competitors.

Pricing Strategy Non Pricing Strategy

● Price Wars ● Subscription and membership discounts
● Cash Burn Strategy ● One-Day deliveries
● Substantial price reduction and massive ● Cash On Delivery & Card On Delivery
discounts ● Online and physical stores
● Price Matching by competitor firms
 Game Theory in E-Commerce Prisoner’s Dilemma

BERTRAND COMPETITION: Two identical firms selling homogenious products compete on price.

As price-cutting leads to greater customer acquisition, leading to higher profits, the two firms
would be essentially competing in setting the lower price to gain an edge over the other.

Pricing strategy Max. Price customer No of units that Low

willing to pay can be sold
Price Earnings:
Low 5 100
5*(100+100) = 1000 Rs
High 12 100 High
Price Earnings:
12*100 =
1200 Rs
Application of Prisoner’s Dilemma
Amazon’s Choice
Prisoner’s Dilemma Low Pricing High Pricing

Low Pricing 5,5 10,0

Flipkart’s
High Pricing 0,10 6,6
Choice

Dominant Strategy for both firms is a low price strategy resulting in NASH Equilibrium
at (Low, Low) i.e. (5,5)
But, Optimal strategy is (High, High) where both would have increased their earnings.
 Game of Chicken
The second firm soon replicates actions taken by the first. Customers value these new offerings, and with time both, the
firms build their loyalty base.

Loyalty for Amazon & Flipkart is 40% each.

Amazon chooses

Flipkart chooses Low Pricing High Pricing

Low Pricing 5,5 8,4.8

High Pricing 4.8,8  6,6

In this scenario, no firm has a Dominant strategy & this game has two Nash Equilibria:
[High, Low] & [Low, High] 

Here, the underlying assumption was that both the firms set prices simultaneously without
knowing what the other firm will do.
Application of Stackelberg Game

Stackelberg Game: The firm with an innovation gets the “First mover advantage” to decide what price it
wants to set. This decision requires the firm to consider that second firm can imitate the same innovation at a
lower cost & price to gain market share
A – Amazon (First mover) F – Flipkart (Second mover)
Innovation: One day Delivery Pricing: Same as payoff matrix considering loyalty
A chooses
A chooses A chooses Low
High Low
High Low
F F
Chooses Chooses F F
High Low High Chooses Chooses
Low F chooses High
Low High
(8,4.8)
(4.8,8) (8,4.8)
(6,6) (4.8,8) (8,4.8) (5,5)

Analysis of Amazon’s One day delivery(First mover)

 Interpretation of Results
It is not necessary to enter the drastic “Price Wars”
Customers value product innovation & differentiation
Condition Suitable Action
In-elastic Demand Build Loyalty by continuous innovation
Elastic Demand Selective pricing, discounts, coupons,
special offers
First Mover Advantage By setting the right price and innovation
firm can acquire larger market share
Imitation Most of the cases it beneficial for the
follower firm to imitate to retain loyalty and
stay relevant
Cost-Benefit Analysis The cost of innovation should be not more
than the increased earning
 Assumptions!

 The increased earnings due to market capture outweigh the cost of product
differentiation.
 Adding more firms will change the market share, but for the scope of this
project, we have limited to just two firms.
 Customers choosing lower prices are relatively less loyal as the high price
elasticity and would prefer channels that offer lower prices. 
Thank you!
Open for questions