The primary objective of every business is to maximize profits. Pricing is one of the principal determinants of profitability for organizations. Therefore, every organization should stay awake to the pricing strategies employed by the competitors. This means that the most appropriate pricing strategy should be competitor based. This is because most players in a given industry sell almost similar products. When products of two or more companies are similar in a given industry, substitutes pose a significant threat to profitability. As such, the rival firms will be rendered interdependent in terms of pricing. Therefore, to remain competitively relevant, firms should endeavor to predict price-setting strategies of rival firms accurately in order to maximize profits. To achieve this, firms apply the game theory in order to make appropriate pricing decisions that will not backfire.
Since the products may be similar, firms need to adopt unique value propositions. A value proposition refers to a feature intended to make a given product attractive to customers. Attractive value propositions can help companies make huge sales at a price similar to that of competitors. When the prices of a company remain unchanged, the competitors will not respond in a way that will have negative implications on the company. Concerning game theory, a firm can relate to the prisoner’s dilemma. This would promote a cooperative behavior among the players in a given industry. Tit-for-tat strategies are essential in such a context.
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Firms can maintain high sales at competitor based prices through use of various marketing techniques: planned obsolescence and perceived obsolescence. In planned obsolescence, firms can design products that can be replaced by new, enhanced ones after a while. For instance, an organization can produced computers with varying processing speeds, with new ones being superior. This will make consumers to buy the new ones for purposes of upgrading. Perceived obsolescence relates to producing similar products with similar attributes but varying aesthetic features such as size, color, and shape. This will create an impression that the old ones are obsolete compared to new ones. In this way, sales can be maintained or increased without changing the price.
Game theory can be applied by firms in a given industry to predict the actions likely to be taken by a rival firm following the execution of a business strategy. Therefore, firms will be able to recognize the interdependencies that exist among the industry players.
