Question

Suppose that you are the market leader and have more than 70% of market share. There are 5 other smaller players in the market. As the market leader you realized that the market price is substantially lower than what it should be. One of your managers argue that your company should raise the price first and then the others would follow. Is the manager correct? Provide your answer based on oligopoly and game theory concepts.

Answer 1

• the concern firm is the major market share holder,there are five other players who are dealing with the remaining 30% share and there is cut throat competition in the market for influence the consumers.
• in this situation the kinked demand curve would represent the present scenario.where increase in price from a particular price point leads to elastic demand curve and decrease in price leads to inelastic demand curve.
• as per the kinked demand curve if the price is increased then the firm would not follow because the firm which would increase its price will lose many customers and other firms won't follow it and would maximize their market share.

Therefore the manager's suggestion can't be hold true.

• on the basis of game theory decision the first thing which a company can do is to analyze and observe the strategy of the other companies,
• the price can be increased only after the mutual consent of all the firms which wouldn't impact anyone's market share,otherwise company can't increase price and this is not feasible either
• to maximize profit a firm can decrease its cost per unit and thus would increase its profit.