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Corporate Finance Project - Essay Example

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Regarding the corporate investment viewpoint, the game theory has a great value for the specific industry that is specially characterized as an example of oligopoly market. So, before starting our discussion, we need have a specific idea of oligopoly competition…
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Corporate Finance Project
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Download file to see previous pages Because of their fewness, oligopolists have considerable control over their prices, but each must consider the possible reaction of rivals to its own pricing, output & advertising decision.
Oligopoly pricing behavior has the characteristics of certain game of strategy, such as poker, chess, & bridge. The best way to play such game depends on the way one's opponent plays. Players (& oligopolists) must pattern their actions according to the actions & expected reaction of rivals. The study of how people behave in strategic situations is called game theory. In other words, game theory analyzes the way that two or more players choose strategies that jointly affect each-other. This theory that sounds frivolous in its terminology is fought with significance & was largely developed by john Von Neumann (1903 - 1957), a Hungarian-born mathematical genius. Economists, union-management disputes, country's trade policies, international environmental agreements, reputations, & a host of other situations have used game theory. It offers insights for policies, welfare, & everyday life as well. Thus, similarly, in our motto in the market competition in the product market for business investment purpose, this theory has a major implication. To realize so, we will need to move for the further analysis.
Here, the vertical rust arrows show uptown's price cuts; the horizontal rust arrows show Starship's matching each price cut. ...
Why Because the only price compatible with both stratifies is a price of 0, 90% of 0 is 0. Finally, it dawns on the two firms- when one firm cuts its price, the other firm will match the price cut. Only if the firms are shortsighted will they think that they can undercut each-other for long. So, they will think that- What will my rival do if I cut my price or raise my price
Basic Explanation:
In a duopoly market, it is assumed that each firm has the same cost & demand structure, each can choose whether to charge its normal or lower price below marginal cost & try to drive its rival into bankruptcy & then capture the entire market. The novel element is the firm's profits will depend on its rival's strategy as well as on its own growth. A useful tool for representing the interaction between two firms is a two way payoff table or matrix which shows the strategic & payoffs of a game between two players. In this table, a firm can choose between the strategies listed in its rows or columns like below-
In this figure, each firm decides whether to charge its high price or to start a price war by choosing a lower price. Cell A, at the upper left, shows the outcome when both firm choose the high price; D is the outcome when both choose to conduct a price war & B & C result when one firm has a high price & one a war price. The numbers insight the cells show the payoffs of the two firms, the profits earned by each firm for each of the four outcomes. The rust number in the lower left shows the payoff to the player on the left (Starship), the upper right shows the payoff of the player at the top (Uptown) as the firms are identical, the payoffs are mirror images.
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