Question

Part I:

Afghan Handicraft Exporters Vs Iranian Handicraft Market:

Game theory studies strategic situations. It is the science of strategic decision making. It has been used to great effect in sciences as diverse as evolutionary biology and economics.

Refer to below short case study and respond to listed questions using the core concept of Game theory to determine and analyses the expected outcome.

“A company, say Afghan Handicraft, is considering entering the Iranian’s market which is dominated by its principal rival, say Iranian Handicrafts. Clearly, Afghan Company’s decision to enter or not will be judged on the potential profitability of such a move. This, in turn, depends upon the way Iranian Manufacturers will react

to such a business move by Afghan Handicraft. If Iranian Manufacturers reacts aggressively by launching a big commercial campaign, then an entry by Afghan Handicraft will result to a loss of $3 million for Afghan Handicraft Exporters and a loss of $1.5 million for Iranian Manufacturers. If, on the other hand, Iranian Manufactures accommodates Afghan Handicraft exporter’s entry, then both Afghan and Iranian Manufactures will be making profits of $0.5 million and $1 million, respectively. Finally, if Afghan Exporter does not enter the market at all, then Iranians will be making monopoly profits of $4 million”.

Required:

a) What would you do if you were the CEO of Iranian Handicraft? Define and justify your strategy. ( 3 Marks Only)

b) Would you play aggressively or would you accommodate Afghan Exporters entry? ( 3 Marks Only

c) What about if you were Afghan Handicraft Exporters CEO? ( 3 Marks Only)

d) Would you enter the Iranian market or would you not? (3 Marks Only)

e) How Game theory Improve the Quality of business decision (2 Marks Only)

f) How important the timing of the decisions made by the two companies is for the outcome of the game? You can also develop the payoff matrix to discuss the expected outcomes for each player if the game is played once. (3 Marks Only)

g) Game theory can be used very effectively as a tool for decision-making whether in an economical, business or personal setting. Discuss how and why only in the light of the cases study provided in this paper? (3 Marks Only)

Answer 1

a) If I'm a CEO of Iranian Handicraft then I would like that Afghan Handicrafts exporter won't enter Iranian market and we'll enjoy our monopoly. As we'll earn maximum if they won't enter and even they are also in benifit if they won't enter because they will had to face loss of $3m. We'll like to raise barriers of entry that will make Afghan Handicarfts entry difficult.

b) If Afghan enter we play aggressively because it is important for us to retain our monopoly. Because if we played aggressively we'll face loss of $1.5m that will going to recover in later years by maintaining the monopoly.

c) If I were Afghan Exporter CEO then I would not like to enter in Iranian Handicraft market as risk is too high and reward is really less. But I will try to make more strategies to enter into market of different countries to increase our customer base. And if Afghan Handicrafts entered Iranian markets then it is more likely that they will face loss of $3m as they were more likely to react aggressively to retain monopoly.

d) I won't enter in Iranian market as risk is very high and return is very less. Even if I entered it is more likely to have losses. If risk to return ratio is equal then I would surely take risk once to enter.