Managerial Economics: Pricing Strategy and Prisoner's Dilemma

This assignment explores the application of the Prisoner's Dilemma in pricing strategies within the context of managerial economics. The first part analyzes whether low-price guarantees are consumer-friendly, using game theory and payoff matrices to illustrate the strategic interactions between sellers and consumers. The analysis suggests that due to a lack of cooperation between parties, the guarantees may not always provide the best solution for the consumer. The second part discusses non-price competition, examining how firms compete on dimensions beyond price, such as advertising, product features, and branding, particularly in monopolistic competitive and oligopolistic markets, using examples like Coca-Cola and Pepsi to demonstrate these competitive dynamics. The document highlights the role of market research and brand image in non-price competition, emphasizing the strategic choices firms make to attract and retain consumers.

Running head: APPLICATION OF PRISONER’S DILEMMA IN PRICING STRATEGY
Application of Prisoner’s Dilemma in Pricing Strategy
Name of the Student
Name of the University
Author Note

1APPLICATION OF PRISONER’S STRATEGY IN PRICING STRATEGY
Table of Contents
Answer to question 1:......................................................................................................................2
Answer to question 2:......................................................................................................................3

2APPLICATION OF PRISONER’S STRATEGY IN PRICING STRATEGY
Answer to question 1:
The prisoner’s dilemma is a significant conceptual framework of the game theory. This
particular concept is applicable for various types of subjects including economics, sociology,
psychology and finance. The theory is aimed at formulating appropriate strategy to fetch an
optimum solution with the help of competition and cooperation between the entities. As per the
theory, the two parties might get deprived from achieving their rational solution owing to having
a lack of cooperation (Panico 2017). This unfair outcome occurs due to the difference in the
rational thinking of the individual and a group of people. Contextually, the consumers are often
unable to gain the optimum interest in the case of lower price guarantee scheme provided from
the producer end. The following section explains why price fall guarantee seems not capable of
providing friendly solution for the customers.
Seller vs. Consumer –
Payoff matrix
Seller
Cooperate Defect
Consumer Cooperate 20, 20
(a)
0,50
(c)
Defect 50,0
(b)
10, 10
(d)
(Source: created by the author)
Referring to the table 1, the pay-off matrix provides non-numerical aspect reflecting the
combination of the utility gained by the consumer and buyer during the tradeoff of the product.
The contextual meaning of the cooperation is that the consumer is agreed to pay the price as per
Table 1: Pay-of matrix

3APPLICATION OF PRISONER’S STRATEGY IN PRICING STRATEGY
the producer wants (Muggy and Heier Stamm 2014). In contrast, the defect occurs when both
entities take back from cooperation. During the course of defecting, the consumer bargains to get
a considerable discount in the purchase price as per her satisfaction level. Conversely, the seller
wants no negotiation related to the purchase price of the product (Robèrt and Broman 2017). On
the account of the above utility matrix, the consumer will be fully satisfied provided with zero
satisfaction level of the seller in the cell b. In contrast, the cell c provides optimum utility level
for the seller, but the buyer literally feels unsatisfied. In terms of the outcome of the cell c, both
the buyer and seller need to sacrifice their individual utility level in order to get equal and
marginal level of benefit. The highest pay-off is found in the cell d, where both the parties obtain
the maximum satisfaction point, however, the economy will never be able to operate at this
certain level (Wensley 2016). Both the parties will be agreed to operate when the economy gains
marginal benefit in cell a. The consumer is not aware of each other strategic decision and
therefore, the consumer cannot make appropriate tradeoff strategy in order to obtain the optimum
output level. Hence, the price fall fails to obtain the optimum solution for the customer.
Answer to question 2:
Non-price competition is generally concerned with the promotional strategy including
sales promotion, advertising, innovative product features, inclusive support service and
advancement in the product quality. Extensive market research is the key source of the non-price
competitive structure. The sellers in the monopolistic competitive and oligopolistic market often
apply this tool strategically in order to yield different product impression among the buyers
(Watson et al. 2015). In the case of the price competition, the market decides the price level in
accordance with the given demand curve and manipulates the price structure in order to attain the
maximum revenue. Conversely, the product price depends on the change of the demand curve.

4APPLICATION OF PRISONER’S STRATEGY IN PRICING STRATEGY
The competitive sellers aim to augment the sales on the means of product variation apart from
diminishing the price level. This results in the enhancement of the profit of the firms instead of
altering the commodity price.
For example, the Coca-Cola and Pepsi are considered the rival competitors in the
oligopolistic market. According to the economists, there exists a few number of large firms in the
oligopolistic framework. The relative size of the firms are not significantly different. Further,
both the concerned companies manufacture same type of products at same price level. The
products are conceptualized with the aim of same objectives (Veldman and Gaalman 2014).
These two renowned beverage industries hold a significant market share across the world. The
extensive consumer base is considered as a fundamental market strength of these companies. The
companies are required to employ effective market strategy in order to retain large consumer
base. The companies intentionally give best efforts on their advertisement skills, including the
packaging system in order to generate a different consumer appeal. Altogether, the brand image
plays an effective role in the case of non-price competition.

5APPLICATION OF PRISONER’S STRATEGY IN PRICING STRATEGY
References
Muggy, L. and Heier Stamm, J., 2014. Game theory applications in humanitarian operations: a
review. Journal of Humanitarian Logistics and Supply Chain Management, 4(1), pp.4-23.
Panico, C., 2017. Strategic interaction in alliances. Strategic Management Journal, 38(8),
pp.1646-1667.
Robèrt, K.H. and Broman, G., 2017. Prisoners' dilemma misleads business and policy
making. Journal of Cleaner Production, 140, pp.10-16.
Veldman, J. and Gaalman, G., 2014. A model of strategic product quality and process
improvement incentives. International journal of production economics, 149, pp.202-210.
Watson IV, G.F., Worm, S., Palmatier, R.W. and Ganesan, S., 2015. The evolution of marketing
channels: trends and research directions. Journal of Retailing, 91(4), pp.546-568.
Wensley, R., 2016. The basics of marketing strategy. In The marketing book (pp. 75-107).
Routledge.