Determine the optimal strategy for the situation by representing it as a game an

Question

Determine the optimal strategy for the situation by representing it as a game and finding the saddle point. State your final answer in the terms of the original question. In an ongoing price war between Burger Haven (locally owned) and MacArches (a chain), both restaurant managers plan to change the price of a hamburger by 10. If they both raise their prices, there will be no change in their market shares, but if they both lower their prices, the chain's national advertising will ensure that MacArches gains 4% of the market. Again because of advertising, if Burger Haven lowers their price and MacArches raises their price, Burger Haven will gain only 2% of the market, but if Burger Haven raises their price and MacArches lowers their price, MacArches will gain 9% of the market. Use this information to decide what the managers should do. What does L represent? L represents lowering the price by 10. L represents raising the price by 10. What does R represent? R represents lowering the price by 10. R represents raising the price by 10. The saddle point is the in row and column. What should the managers do? Burger Haven should lower its prices, while MacArches raises its prices. MacArches should lower its prices, while Burger Haven raises its prices. Both restaurants should lower the price. Both restaurants should raise the price.

Explanation / Answer

L represents lowering the price by 10 cents

R represents raising price by 10 cents.

Information provided in the question can be presented in below tabular format.

Since MacArches will gain market share if they lower the price. It is 4 % in case Burger haven also lowers and 9 % if Burger Havens raises. Hence MacArches manager will lower the price. Anticipating this Burger Havens will also lower price to minimize its market share loss. Hence the answer is:

C. Both restaurents shoul lower the price

MacArches Burger Haven L R L MacArches gain 4% Burger Haven gain by 2% R MacArches gain 9% No change in market share

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