Question

The following is a case study using a recent event:

CVS versus Walgreens: An interesting recent case involves two pharmacists CVS and Walgreens. Rather than a situation where the two indulge in a competitive battle against each other over advertising or a price war, they battle against each other on the services offered. In early June 2010, Walgreens announced that it would “no longer participate in new and renewed benefit plans from its rivals (CVS) drug benefits unit” (CNN Money, June 7, 2010).

The main grievance of Walgreens was CVS Caremark’s Maintenance Choice Plan which started requiring patients that have chronic medical conditions to fill their prescriptions at CVS pharmacies only rather than giving them the choice to fill it at Walgreens (or other pharmacies). As a result of this announcement both companies shares fell — CVS fell 8% and Walgreens fell 2.7%. As a response CVS in a couple of days decided to drop Walgreens from its pharmacy benefits plan, which would force some of its benefits customers to pay a much larger amount to get their drugs from Walgreens, leading to a potential loss of customers for Walgreens.

As a result CVS shares fell 1.5% and Walgreens fell 3%. Eventually, about a week later the two pharmacies decided to end their war, coming to a compromise agreement the financial terms of which were not disclosed. As a result both firms saw their stock values increase. Briefly comment on this example as an application of the Prisoners Dilemma game

within 400 words discuss this case study

Note: please make sure explain it within 400 words or more

Answer 1

Game theory is a mathematical technique of analysing the behaviour of rival firms with regards to the changes in prices, outputs and advertising expenditure in the situations of conflict of interest among individuals or firms.

Prisoner's Dilemma Game theory:
        Suppose two persons have been arrested for a crime by the police and are being interrogated in seperate rooms. If only one of them confesses he/she gets a light punishment say 1 year of imprisonment and the other for 10 years. If they both confess each get 5 years and if both do not confess they each get 2 years of imprisonment. It is the self-interest which leads each prisoner to confess and prevents them from attaining the best solution.

- In the case of CVS versuss Walgreens pharmacies, the two rivals battle against each other on the services offered.

1) First Walgreens decides not to partticipate in CVS's drug benefits unit, thereby its shares fell by 2.7% and CVS's by 8%. Now here both suffered loses but CVS's loses were more.

2) So now CVS decides to retaliate by dropping Walgreens from its pharmacy benefit plans, and as a result CVS's shares fell by 1.5% and Walgreens by 3%.

They could go on with this war and in the process both make losses. Eventually, the two pharmacies decided to end their war, and come to an agreement. As a result both firms saw their stock values increase.

Hence, like in the case of the prisoner's dilemma, the two Pharmacists benifit by cooperating with each other. And if the two pharmacists decide not to cooperate with each other and look for self interest it will be like both the prisoners confessing and prevents them from getting the best solution.