Answering the age old question: the crown or the clown?
The Market Games
A normal day in the mall’s food court and we hear a conversation. Same old, usual stuff. “Guys, decide between McD or Burger King.” And, a normal reply: “I can’t tell, both have almost the same quality and almost the same prices”. Let’s dive in deep to understand why this dialogue is such a cliché in food courts.
- Pricing Wars (the smaller Game)
Pricing Wars. Ever thought of why this dilemma occurs? The answer is because these big firms are themselves in a larger dilemma. No need to get yourself worked up, as this too can be explained with the help of ‘Game Theory’. A concept in game theory known as the Prisoner’s dilemma will help us to understand the real life market pricing and working.
This situation arises in all the oligopolistic markets. Here, we have McD and Burger King as players in the game wherein both have to decide the price for their famous meals. For the purpose of illustration, let us assume that either they can choose Rs 50 or Rs 70 as the price. If both of them choose to set the price as Rs 70, then both of them will get a payoff of Rs.15 billion annually. If one of them sets the price as Rs70 and the other sells at Rs.50 then the firm which sells at Rs70 will get a pay off out of Rs5 billion whereas the one with Rs 50 will get Rs30 billion. This is because the consumers will go to the one with the lower price. If both set the price at Rs50 then both will get Rs10 billion. Here is how the payoff matrix looks like -
If McDonalds charges Rs70 then Burger King can charge Rs50. Then McDonalds will itself start selling at Rs 50 to get a great profit again. So the best strategy for both the players to survive in this race is to maintain a lower price. The outcome of the profit will be Rs10 billion to both of them. Hence, we conclude that the profit of both the firms not only depends upon itself but on the competitor too. This is a characteristic feature of an oligopoly.
The outcome of the prisoner’s dilemma is a Nash equilibrium. A Nash equilibrium is a combination of strategies such that no player firm has any incentive to unilaterally change its strategy. When both players of a game have dominant strategies, the outcome which is the intersection of the dominant strategies is a Nash equilibrium. Here we all can easily see that the Nash equilibrium is at (Rs50, Rs50).
So, we saw that prices can’t really vary a lot in an oligopoly. Therefore, companies compete with non-price strategies. Decision makers not only have a product’s or service’s price as a tool to affect demand, but also several marketing actions (e.g. mailings or call centers). The final consumer decision is thus influenced by market prices as well as by the stimuli he or she has been subject to. For example, a customer would for sure prefer the brand which has better customer care facilities than the one which doesn’t, provided the prices are the same.
2. Value Net Framework (the real game)
What is the Value Net Framework?
By combining business strategy and Game Theory, the book ‘Co-Opetition: A Revolution Mindset that Combines Competition and Cooperation‘ argues that it is better for competitors to work together rather than go up against each other in contest. Co-opetition (or coopetition) combines the advantages of both competition and cooperation into a new dynamic model called the Value Net Model. It states that when companies work together, they can create a much larger and more valuable market than they ever could by working individually. Industry players should therefore focus more on ‘growing the pie’ than ‘splitting up the pie’.
We can observe this game play with the help of an example. Uber fits very well in the Value net framework. The Value Net Framework identifies four types of players with which every firm must work, and which in many ways influences the profits: customers, suppliers, competitors and complementary members.
Every player, all equal in value according to the Value Net Model, offers opportunities for cooperation with the organization, including competition.
If we focus on India, Ola is its biggest competitor. Other players of the game are: the customers and drivers. Drivers look like suppliers but they are actually the complementors of Uber. They help in providing the service to the consumer. In a traditional supply chain, product of one firm becomes an input for another firm, in that sense the drivers are not a classic supplier BUT Complementors + Suppliers . There are mainly three games here -
- “Consumer- firm” game- Uber is playing a game with the Target Audience (i.e. the consumer) so that they can earn maximum profit without even losing any customers The pricing strategies depend upon the demands and time. This is also known as Dynamic pricing. One such example is when there is a surge of riders (at peak hours or rainy days) there is an increase in cab fares in order to receive maximum profit . (This strategy was even used by DMRC — Delhi Metro Rail Corporation Limited )
- “Payment to the Complementors/Suppliers” game — Complementors are all those people who work for the company at the ground level which in this case are drivers. A big question arises ‘How much do you pay the drivers?’ If the driver partners are not satisfied they have an option to shift to Ola. Thus at peak hours you will be left with no cabs whereas your competitor’s cab will get all the profit!
- “Competitors” game- We have already discussed this game in the first half(Pricing Wars) .The Game here is , consumers do not switch to other apps and only use Uber’s app. Its competitor-Ola is following a particular pricing strategy so Uber has to create one to outshine Ola. Uber must play safe so that neither their profit decreases nor the customer should complain.
One of the main steps for expanding a company is advertisement. You have to convince the consumers as well as the suppliers and the complementors in favor of your cause. And this could only be done by spending the right money at the right time and at the right place for your publicity.
Many other aspects such as government policies are also there but these change with location and time and hence it’s beyond the scope of this article to talk about them in a generalized manner.
So coming back to our first Question: McDonalds or Burger King ? What path will you choose? You can flip a coin and let fate decide which food giant will be getting your money. You can also be loyal to one brand or you can ditch both and go to Dominos instead! Well, it is your choice! You are an essential pawn in this play-board of business. A decision you make will make a change in the market.
Also, a consumer today can become a producer tomorrow! Why not try out the different roles in this game and see how different moves of yours affect the profit of yours as well as others? So what are you waiting for? Make a choice and start playing more!
REFERENCES:
- “The Right Game” by Professor Adam Brandenburger
- “The Art of Strategy” by Avinash K. Dixit and Barry J. Nalebuff
- https://xplaind.com/472079/prisoners-dilemma
- https://www.youtube.com/watch?v=XP1Lfyx9vMk
