Question

NOTE: PLEASE USE DON'T USE "PRICE DISPERSION" TO ANSWER THIS QUESTION. 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

In a competitive market, price is determined by the market forces of demand and supply of the product. there are large number of buyers and seller so even if one firm deviates from the equilibrium price then people will buy the good from other firms. Hence, predicting the price strategy of rival firms is essential when an industry has mutually interdependent not in perfect competition though as the products are identical and there are large number of sellers.

Predicting rival firm's price strategy is beneficial in oligopolistic market with a few firms like in airlines industry where differentiated goods are being sold and sellers can differentiate themselves by advertising and giving discounts and other means to attract customers.

A competing firm in order to expand has to look at the response of its competitors because it affects the market price of the goods they are producing. Also, there profits depend on the behaviour of other firms.

In game theory such games can be observed like cournot or bertrand model where firms choose prices or output as strategies given the rival firm's strategies. another popular game theory model is kinked demand curve theory where price of each firm depends on the rival firm's price and there are two cases when one firm increases its price of product then rival firm can either increase or remain at the same price. given these strategies firm one will take its decision deriving its payoffs and choosing the price strategy which gives maximum profits. there is a lot of uncertainity in such cases so usually such firms attain more profit through non price competition like advertising and not get into the price war.