Buying any type of product or good is a sequential game in which the owner of th

Question

Buying any type of product or good is a sequential game in which the owner of the product or good sets the price and then the buyer can buy, not buy, or counter and offer a new price.  This can be broken down into the following simple tree diagram:

However, the determination of what Price A and Price B is is often a simultaneous game played between two or more competing companies. For example:  

Taking this into consideration, imagine you are in charge of ticket sales for Drew University.  You have complete autonym in setting ticket prices.  You are charged with selling tickets to four different groups: (1) High Rollers; (2) Semi-Big Shots; (3) Average People; and (4) Cheapos.  You have one other smaller university 60 miles from you (i.e., Muller Institute for Technology) that you are competing with for fans.  Based on all this information, please answer the following questions:

1. What type of market structure is Drew U. competing in and why do you believe this?

2. Describe the strategies would you take in the simultaneous game you are playing against Muller Institute for Technology to set prices and assure the highest possible profit for Drew U. Why would you take these strategies?

3. Based off your simultaneous game discussion in the above question, create a tree diagram to show how your pricing strategy would be presented to the consumers.

a. The tree diagram should begin with Drew U. and have four branches (one for each of the groups you can sell tickets to).  Each branch should indicate a price point you would charge.   

b. Why did you set the 4 price points you did?

c. What strategies can you use in this sequential game to assure you make the most money possible for

Explanation / Answer

1) From the details provided, it is clear that there are only two of us. Drew U and Muller Institute in the market vying for the attention of the different groups. Considering that there are only two competitors in the market, we can safely say that it is an oligopoly. If there were other institutes present and competiting for the same group of audiences, the market could have been a perfect competition. Since the number of competitors in the market is low, it is an oligopoly market.

2) In a simultaneous game, we make the decision on pricing without the knowledge of the Muller Institute’s decision. This means there is a fair bit of risk while pricing the tickets. In order to reduce risks one of the best strategies to adopt is to follow maximin strategy. Maximin strategy is ideal for oligopoly markets where the organizations attempt to reduce risk of losing customers to the competitor. The strategy will maximize the minimum profit derived from the market. Since products in an oligopoly market can be below socially acceptable level, maximin strategy helps in swaying consumers to choose your product.

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