Please Summarize this article about Communicating competitive information,and Applying Game Theory To Managing Price Competition. Pricing Strategies Course

-No longer than 400 words.

Like any other type of market research, information about competitors will be most valuable if it is collected and stored in a systematic way. Activities such as shopping the competition should be done thoroughly and periodically. Information from different sources should be merged into a common framework. The resulting database of competitive information should be kept up to date and be easily accessible to pricing managers COMMUNICATING COMPETITIVE INFORMATION In addition to appreciating the usefulness of collecting information about competitors, it is also important to recognize and understand the potential consequences of the price information that you communicate to competitors. explicit private communication with competitors about pricing-such as sitting down and having a talk constitutes illegal collusion, an anticompetitive practice that could elicit severe penalties. However, a company cannot avoid at least some public communication of price information Customers need to have information on the prices of the products they are considering, and both customers and investors can benefit from information from a company concering its pricing intentions and motives. Because such pricing information is public, it also constitutes communication to competitors.

Price Signaling Strategies When this publicly available price-related information is intentionally managed to have an etilect on competitors, it is known as prke signaling Price signaling typically uses the techniques of publicity, opposed to paid advertising, to communicate pricing information For example, the company can signal competitors throughneas releases, press conferences, giving the media access to company executives, planting articles in op-ed pages of major newspapers, and through blogs and other materials posted on the Internet. The price signaling strategies most often mentioned tend to fall into three broad categories The first category includes strategies to signal competitive strength. For example, a company might publicize its imension to match or beat any price cuts inutiated by competitors. This might give pause to an aggressive competitor, because such matching would prevent the favorable increase in the price differential that may have been intended by the competitor. Moreover, such a signal raises the possibility that initiating a price cut might lead to price warfare companies successively exceeding each other's price cuts which can drastically reduce profits for all of the warring competitors. Such willingness-to-match signals could be supplemented with evidence of the company's ability to carry out such price matching decreases. For example, when its expensive new aitomaned plant was completed, the Goodyear Tire and Rubber Company publicized the plants capabilities that sharply reduced variable costs and thus communicated the company's formidable ability to lower prices A second category of price signaling strategies involves siguls to indicate that a company has limited goals for initiating a price decrease. This means that, rather than being an attempt to take market share away from competitors, the goal of initiating a price cu is more limited. For example, the company could communicate that it is using the price cut only to maintain its market share, which otherwise would be stipping Or it could sigral that the goal of the cut would be to take advantage of high category price elasticity-In other words, to expand the nurket. Ellisco, Inc., a small supplier of inner-threaded metal caps to consumer packaged goods manufacturers, publicly announced that its price cuts were to compete only for their customers' second- source" business the small amount of business that manufacturers allotto small suppliers, as insurance against a disruption of their primary suppliers. In each of these limited-pals signals, the intended message to the company's competitors is there's no need to match this price cut. A third category of price signaling strategies involves the use of price signaling to encourage competitors to match a planned price increase. For example, during a speech or media interview, a company executive could interpret a recent event, such as a backlog of orders, as indicating a need to raise prices. This would suggest that competitors interpret any order hacklog they may have in a similar way. Another possibility would be to provide justifications for a price increase. For example, publicly noting an industry trend ward higher materials costs could give competitors a justification for also increasing prices. Often a sufficient signal is simply to announce a plamed price increase for ahead of time. This would give competitors time to consider the price increase and decide if they will match it. If they do not match it, the initiating company could change its plans and cancel the planned price increase. U.S. airlines have been observed to a post fare increase on a route at the start of a weekend and then retract it Monday morning if competitors who compete on that route do not follow.?

Issues Regarding Price Signaling Because price signaling involves an intention to influence business competitors, the question arises whether or not it is an illegal anticompetitive activity. As will be seen in Chapter 15, price signaling is in a legal gray area. Determinations of its legality have hinged on factors such as the circumstances of the siguling (e.g. Is it seen in a market with only few large competitors!) and its consequences (e.g. Has the profitability of the products in question substantially increased). Most regulatory attention regarding price signaling seems to be on siguals for price increases, such as those seen in the U.S. airline industry. Signals regarding price decreases appear less otten questioned. Indeed, it could be argued that the sigral of the limited goals of a price decrease could have procompetitive effects, to the extent that they serve to help protect weaker companies against overzealous stronger competitors An important price sigraling issue is the question of the degree to which it actually works. Price signaling is sometimes referred to in the economics literature as "cheap talk" There is some evidence from laboratory research that such talk is likely to fall on deaf ears unless the competitors are already of one mind concerning goals and strategies. This raises the possibility that pricing signaling could even backfire by raising the awareness of price competition and bringing to competitors and the possibility of an aggressive response. In this context, it should be noted that competitors could be reading signals into your pricing communications even if you do not imend them. That in itself is a good reason to be aware of the strategies and issues of price signaling.

APPLYING GAME THEORY TO MANAGING PRICE COMPETITION In addition to messages that are intentionally or unintentilly communicated about prices and price-related plans and motives, pricing behaviors themselves can communicate information Game theory involves examining possible patterns of behaviors in order to help predict and manage price competition. A useful tool competition 10 of game theory is a diagram known as a pavoff matrix, the most typical of which contains four cells. The typical payoff matrix is useful because in a very accessible way, it captures part of the essence of price It captures this essence by simplifying things. Normally, a seller is faced with many competitors. However, when the seller is considering any particular competitor, there are only two competitors: (1) the seller and (2) the competitor who is being considered. Thus, the typical payoff matrix includes only two competitors, or "players. Normally, there are many price possibilities. However, the seller's decision often comes down to just two prices: (1) one higher and (2) one lower. Thus, the typical payoff matrix includes only two prices. Because each of the two players has two possible prices, there are four possible price situations. These four situations are the four cells of the typical payoff matrix

Determining the Payoffs If we examine the matrix in Figure 6.10, we can see how one arrives at the outcomes, or payoffs, for each of the two players in each cell of the matrix Let's say that Company A and Company B are approximately equal sized competitors in a nurket that supports sales of $20 million per period at current prices. Each company this hes sales of $10 million per period. Suppose each company has variable costs that are 30 percent of current prices. Suppose that neither of the two companies products are well-differentiated so that a 10 percent price cut by one company will take away half of the sales of the other competitor when the other competitor does not match the price cu. However, if there is a matching 10 percent price cut by the other competitor, then the market's sales will again be equally divided between the two competitors. Figure 6.10 A Game-Theory Payoff Matrix for Price Competition Between Company A and Company B Company Colli DE OB C Glow -1.5VO **** Sowce Adapted from from Nagle (1987) When each competitor's variable costs are subtracted from its sales revenue, the resulting payoffs for each price situation can be observed. If both competitors keep the price at current levels, both earn $7 million gross profit. If Company B drops the product's price and Company A does not, then Company Beans $9 million and Company A carns 33 million. Correspondingy, if Company A drops the product's price and Company B does not, then it is Company A that earns $9 million and it is Company that earns $3.3 million. If both competitors drop their prices, then both companies earn gross profits of S6 million In most game-theory scenarios, it is assumed that both competitors are aware of the entire matrix and will act rationally in other words, they will act to macimize profits). Given this, assume that companies A and B start in Cell 1 of the payoff matrix shown in Figure 6.10. If you were the manager of Company A. what would you do in the next sales period? If you hold price, Company B my cut price and then you would lose profit. If you cut price, you could get more profit but if Company B cuts also, you get less profit. Clearly, it is a dileme .

Playing Repeatedly Over Time Now to capture the dynamics of real price competition, add the lowledge that this game is played repeatedly over time. Because of this, cutting price takes on some new consequences. If, in the next period Company A chooses to cut price, then even if Company B does not cut price in that next round of play Company B is sure to do so after that. Then Company A cannot very well increase price. The two competitors would be relegated to Cell 4 each making $t million less profit than they would have earned if they had both maintained their prices (which would have kept them in Cell 1). Adding this consideration of repeated play over time makes cach competitor think twice about cutting price. It suggests that holding price would be the better move However, what if Company A is faced by Company B cutting its price? Then the margers of Company A miglu feel that their hand is forced Company A would have to lower its price, thus putting both competitors into Cell 4. Is there anything that Company A could do to help avoid this possibility. The answer is yes this might be an opportunity for price signaling. Perhaps Company A could use a public form of communication to discourage Company B from initiating a price cut. For example, Company A could state in trade-association presentations and interviews that its policy is to never allow itself to be undersold. By emphasizing to Company Bits fim intention to match any price cut. Company A can make the managers of Company B aware that although cutting price will increase their profit in the next period, it will lead to a decrease in their proti over the course of repeated play (ie, in the long run). What if a signal such as this does not work and Company A finds itself in Cell 4 might it be possible to get back to Cell 12 One approach to attempting this would be to increase price along with a sigral to influence Company B to match the price increase. A possible signal of that type would be to publicly note that materials costs in this industry have been increasing and would justify higher prices. The hope would be that such a signal would lead Company B to interpret Company A's price increase as a bid to get both competitors back into Cell 1. If the managers of Company B find themselves questioning the sigul, for example suspecting a trap (1.e. an attempt to get the companies into Cell 2), they should use the payoff matrix to think through that idea. If they were to raise price in the next period and then Company A cut price and took the extra profit of Cell 2, then Company A would have no hope of ever getting Company B to raise price again. If Company A is aware of the payoff matrix and is rational, it will be clear to Company A that trying to trap Company B is not in Company A's long-term interest. By contemplating the implications of the payoff matrix the managers of Company.com gain reassurance toward acting in a way likely to maximize proti Although this is just a bare introduction to game theory, it can be seen how a payoff matrix can be a useful sool. It can help the price semer anticipate, and perhaps influence, the competitive factor in the market's price change response

So costs The breakeven approach to price-modification decisions requires an estimate of the marker's sales response that is sufficient to judge whether or not the critical sales level is likely to be exceeded. A standard measure of a market's sales response is the price elasticity: the percent change in unit sales that would coeur for everyone percent change in price. In a breakeven analysis, a price elasticity can be used to caldate an expected change in the level of unit sales, or a price elasticity can be compared to a critical price elasticity. Brand price elasticities are more relevant than category price elasticities for price-modification decisions Research has indicated that brand price elasticities typically fall between 0 and 4. Economic factors that polis toward a higher brand elasticity are the involvement of large amount of money and low switching and search Competitors responses are important for predicting how the market will respond to a price change because they determine how the price change affects price differentials. Knowing whether a company's competitive stance is cooperative aggressive, or dismissive can help in predicting the company's response to a price change. A competitor's stance can be determined from information on its size, brand differentiation, costs, and goals Price siguling involves managing publicly available price related information to have an effect on competitors. A competitor could signal competitive strength, limited goals of a price decrease of the justifiability of a price increase. Price signaling is in a gray area of legality and may not be effective. A game-theory payoff matrix could be a useful tool for making competitive pricing decisions. It could help estimate whether a competitor is likely to initiate a price cut or aid in a decision of whether or not to match a competitor's price increase

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