Competitive Analysis: Game Theory

Wing Sun Li
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Wing Sun Li: Beijing Normal University–Hong Kong Baptist University

Chapter 8 in Strategic Management Accounting, 2018, pp 143-156 from Springer

Abstract: Abstracts A firm could not make proper pricing decisions without taking due regards to market’s interactive responses. However, it is not easy to calculate competitor’s dynamic responses to price changes. This dynamic process arises from the firm’s relative market power and also from its rivals’ response – what are the responses of rivals with respect to the pricing decision. Game theory provides a methodology of speculating rivals’ reciprocal responses given the intended actions. This chapter discusses how game theory can be used to speculate rival’s response to price change given some rational behavioral assumptions. It explicitly seeks an optimal decision making when each player carefully considers the likely actions and reactions of its rivals. It assumes that players are rational and self-interested and can always make decisions based on expectations of its rivals’ different courses of actions. This chapter introduces basic concepts of game theory and focuses discussions on simultaneous move and noncooperative conditions. It explains how to identify strictly dominant strategy and Nash equilibrium (based on the choice of the rival) and employ this technique to seek the optimal price decision in various payoff scenarios. As price is largely determined by the relative market power of the firm and its rivals, this chapter also explicates how firms decide price and/or output level to optimize the market influence. Examples and a case on tendering are provided to demonstrate how this powerful analytical approach can be used.

Keywords: Game theory; Relative market power; Noncooperative condition; Price tendering; Nash equilibrium; Pricing decisions (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/978-981-10-5729-8_8

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