Question

"Predicting Price-Setting Strategies" Please respond to the following:

Determine the importance of predicting the pricing strategies of rival firms in an industry characterized by mutual interdependence. Examine the common price setting strategies of airlines that use game theory. Predict the potential effects of such pricing strategies on the demand for seats, and conclude the resulting impact on the profitability of the airlines.

Answer 1

Solution:-

Price dispersion is greatly affected by the competition and strategies. Pricing can be seen as one of the most important decisions which are made by any organization apart from its organizational structure. In case of an oligopolistic market structure, the actions of one company will have a greater impact on the other oligopolistic market structures in the same industry. Oligopoly is a market structure where three are very limited number of firms offering either similar of differentiated products to the customers and there is a greater level of interdependencies among the firms operating within the industry.

As there is only limited number of firms in the oligopolistic market structure, thus it is quite important for any firm to worry about the pricing strategies adopted by its competitors. For example, of one of the competitors reduces the price of its products, and the firm does not later its price, then there is a greater chance that the competitor will win many customers of the firm and thus increasing its market share.

The game theory is nothing but the situation of decision making on the basis of a decision made by others. When we talk about barometric pricing strategy, the change in pricing is announced by the firm as it has the expectation that other firms in the industry will follow its decision to reduce the price. The size of the firm is dynamic and leadership also goes though the transitions time to time. The most important thing to remember is that thee leaders should be reasonably appropriate in its interception of changing demand and cost conditions s that almost all the firms in the industry adopt the price change. The barometric price leader mainly limits itself to imitate the change as per the requirement of market conditions and the other firms follow it for their betterment.