Suppose Philips and Toshiba are the first companies to introduce digital versati

Question

Suppose Philips and Toshiba are the first companies to introduce digital versatile disk (DVD) machines to the market. Studies by the firms suggest that consumers who purchase consumer electronics are very brand-loyal. To capture future loyalties, each firm will attempt to maximize its initial market share, for one time only, by setting prices. An economist has estimated the initial market share of each firm under different pricing scenarios. Her results are captured in the following payoff matrix. Given this scenario, if you were in charge of pricing at Philips, what price would you charge? Explain. b. What market share would you anticipate as a result of your pricing strategy? Explain

Toshiba

Philips

Strategy

P = $250

P = $500

P = $1,000

P = $250

60%, 40%

75%, 25%

95%, 5%

P = $500

25%, 75%

90%, 10%

75%, 25%

P = $1,000

5%, 95%

25%, 75%

70%, 30%

Toshiba

Philips

Strategy

P = $250

P = $500

P = $1,000

P = $250

60%, 40%

75%, 25%

95%, 5%

P = $500

25%, 75%

90%, 10%

75%, 25%

P = $1,000

5%, 95%

25%, 75%

70%, 30%

Explanation / Answer

a. Given this scenario, if you were in charge of pricing at Philips, what price would you charge? Explain.
b. What market share would you anticipate as a result of your pricing strategy? Explain.

answers

a. Note that Toshiba's dominant strategy is to charge a price of $250. Anticipating this, Philips should likewise charge a price of $250. This is the only Nash equilibrium to the game.

b. You should anticipate a market share of 60 percent.

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