Price wall or war: The pricing strategies for retailers
Journal
IEEE Transactions on Systems, Man, and Cybernetics Part A:Systems and Humans
Journal Volume
39
Journal Issue
2
Pages
331-343
Date Issued
2009
Author(s)
Abstract
In this paper, we apply the game theory to study some strategic actions for retailers to fight a price war. We start by modeling a noncooperative pure pricing game among multiple competing retailers who sell a certain branded product under price-dependent stochastic demands. A unique Nash equilibrium is proven to exist under some mild conditions. We demonstrate mathematically the incentives for retailers to start a price war. Based on a strategic framework via the game theory, we illustrate the use of service level to build price walls which can prevent a huge drop in price, as well as profit. Three kinds of price walls are proposed, and the respective strengths and weaknesses have been studied. Analytical conditions, under which a price wall can effectively prevent big drops in both market share and profit, are developed. Aside from the proposed price walls, two other pricing strategies, which can lead to an all-win situation, are examined. ? 2009 IEEE.
Subjects
Game theory; Price war; Pricing game; Retailing; Service level
Other Subjects
Competition; Costs; Drops; Military operations; Sales; Analytical conditions; Branded products; Market shares; Nash equilibrium; Price war; Pricing game; Pricing strategies; Retailing; Service level; Stochastic demands; Strategic frameworks; Game theory
Type
journal article