Question

While there is a degree of differentiation between major grocery chains like Albertsons and Kroger, the regular offering of sale prices by both firms for many of their products provides evidence that these firms engage in price competition. For markets where Albertsons and Kroger are the dominant grocers, this suggests that these two stores simultaneously announce one of two prices for a given product: a regular price or a sale price. Suppose that when one firm announces the sale price and the other announces the regular price for a particular product, the firm announcing the sale price attracts 1,000 extra customers to earn a profit of $5,000, compared to the $3,000 earned by the firm announcing the regular price. When both firms announce the sale price, the two firms split the market equally (each getting an extra 500 customers) to earn profits of $2,000 each. When both firms announce the regular price, each company attracts only its 1,500 loyal customers and the firms each earn $4,500 in profits. If you were in charge of pricing at one of these firms, would you have a clear-cut pricing strategy?

If so, explain why. If not, explain why not and propose a mechanism that might solve your dilemma. (Hint: Unlike Walmart, neither of these two firms guarantees “Everyday low prices.”)

Answer 1

The second Nash equilibrium strategy profile is given by Albertson adopts regular price and Kroger adopt sales price. In this case, none of the players will have incentive to deviate as both the strategy assures higher payoff in comparison with other alternative strategy.

The Nash equilibrium payoff received in this case are ($3000, $5000) Any deviation from the Nash equilibrium strategy will result to a lower payoff strategy.Since there are two pricing strategies for two player in the game (Regular price, Sale price) and (Sale price, Regular price) Thus, there is not a single dominant strategy for the firms. Meaning there is no clear-cut pricing strategy. In the absence of clear-cut pricing strategy firms can overcome this dilemma by announcing and guaranteeing sale price on alternative weeks. The other way is that the firms guarantee everyday low prices such as the firm promises to charge only the sales price. under this case the best response of the rival firm is to charge regular price and in this way the firm which charges sale price will make higher profits of $5000