61710779 Prashant Pratap Singh I 61710766 Tanuj Govil
I
61710788 Vishal Iyer
I
61710825 Gaurav Gupta
K
61710280 Rashida Bohra
K
JUDO ECONOMICS The Game Background Information: In a certain market, there is a single incumbent player with sufficient capacity to serve all potential buyers. There is also a second company, which is considering entering the market. Stages of the Game: 1) In the first stage, the potential entrant must decide whether to enter the market. If it enters, it incurs a nominal, irrecoverable entry cost. 2) In stage two, the entrant decides simultaneously on how many buyers to target and on a single price at which to offer its product to the buyers it is targeting. 3) In stage three, the incumbent responds to the entrant’s choices by deciding on a single price at which to offer its own product to all buyers. 4) In the fourth and final stage, buyers make their purchase decisions, and each company serves the buyers that decide to purchase from it. Variables:
M% = Market Share targeted by the Entrant Firm PE = Price Charged by Entrant Firm PI = Final Price of Incumbent Firm CE = Cost of the Entrant Firm CI = Cost of the Incumbent Firm WTPE = Willingness to Pay for Entrant Product WTPI = Willingness to pay for Incumbent Product K% = % of customers not buying any of the product
Assumption:
Total number of buyers = 100 K% = 0 PE = PI
Game Analysis Case 1: CE = CI Market Share = M% Price Entrant = PE
ENTRANT
Enter
Case 2: CE > CI
Market Share = M% Price Entrant = PE
Market Share = M% Price Entrant = PE
Did not Enter
Case 3: CE < CI
Incumbent FIrm = 5000 Entrant Firm = 0
Market Share = M% Price Entrant = PE
Judo Strategy for the Entrant The best strategy for the entrant firm is to charge a specific market segment at such a price that the best response for the incumbent firm is to serve the segment of the market not targeted by the entrant. In response to Entrant, Incumbent should price either same or a little lower than entrant. (For simplicity assuming PE = PI) Three different scenarios, which are possible in the game, are as follows: 1. CE = CI CE = CI = $ 100 ; WTPE = WTPI = $ 200 2. CE > CI CE = $120 ; CI = $ 100 ; WTPE = $ 160 , WTPI = $ 200 3. CE < CI CE = $80 ; CI = $ 120 ; WTPE = WTPI = $ 200 Case 1:
CE = CI CE = CI = $ 100 ; WTPE = WTPI = $ 200
The best strategy in this case for the entrant would be to target a specific market segment with share of M% by charging Price (PE ~ PI) such that it is more profitable for the incumbent to target rest of the market by charging Max WTP rather than targeting the whole market at the competitive price. (200 − 100) × (100 − 𝑀𝑀%) ≥ ( 𝑃𝑃𝐸𝐸 − 100) × 100 Entrant Firm Profit ( 𝜋𝜋𝐸𝐸 )
𝑃𝑃𝐸𝐸 ≤ 200 − 𝑀𝑀%
𝜋𝜋𝐸𝐸 = (𝑃𝑃𝐸𝐸 − 𝐶𝐶𝐸𝐸 ) × 𝑀𝑀%
𝜋𝜋𝐸𝐸 = (200 − 𝑀𝑀% − 100) × 𝑀𝑀%
Maximizing Profit (Differentiating and equating to zero)
Case 2:
M% = 50% PE = $ 150
𝜋𝜋𝐸𝐸 = $2500 CE > CI CE = $120 ; CI = $ 100 ; WTPE = $ 160 , WTPI = $ 200
The best strategy in this case for the entrant would be to target a specific market segment with share of M% by charging Price (PE ~ PI) such that it is more profitable for the incumbent to target rest of the market by charging Max WTP rather than targeting the whole market at the competitive price. (200 − 100) × (100 − 𝑀𝑀%) ≥ ( 𝑃𝑃𝐸𝐸 − 100) × 100 Entrant Firm Profit ( 𝜋𝜋𝐸𝐸 )
𝑃𝑃𝐸𝐸 ≤ 200 − 𝑀𝑀%
𝜋𝜋𝐸𝐸 = (𝑃𝑃𝐸𝐸 − 𝐶𝐶𝐸𝐸 ) × 𝑀𝑀%
𝜋𝜋𝐸𝐸 = (200 − 𝑀𝑀% − 120) × 𝑀𝑀%
Maximizing Profit (Differentiating and equating to zero)
Case 3:
M% = 40% PE = $ 160
𝜋𝜋𝐸𝐸 = $1600 CE < CI CE = $80 ; CI = $ 120 ; WTPE = WTPI = $ 200
The best strategy in this case for the entrant would be to target a specific market segment with share of M% by charging Price (PE ~ PI) such that it is more profitable for the incumbent to target rest of the market by charging Max WTP rather than targeting the whole market at the competitive price. (200 − 120) × (100 − 𝑀𝑀%) ≥ ( 𝑃𝑃𝐸𝐸 − 120) × 100 𝑃𝑃𝐸𝐸 ≤ 200 −
Entrant Firm Profit ( 𝜋𝜋𝐸𝐸 )
4 𝑀𝑀% 5
𝜋𝜋𝐸𝐸 = (𝑃𝑃𝐸𝐸 − 𝐶𝐶𝐸𝐸 ) × 𝑀𝑀%
𝜋𝜋𝐸𝐸 = �200 −
4 5
𝑀𝑀% − 80� × 𝑀𝑀%
Maximizing Profit (Differentiating and equating to zero)
M% = 75% PE = $ 140
𝜋𝜋𝐸𝐸 = $4500
FINAL SUMMARY Profit for both incumbent and the entrant firms are listed in the table below
COST
WILLINGNESS TO PAY
PRICE CHARGED
MARKET SHARE
ENTRANT INCUMBENT ENTRANT INCUMBENT ENTRANT INCUMBENT ENTRANT INCUMBENT CASE 1 CASE 2 CASE 3
