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Market structure of Oligopoly - Assignment Example

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Owing to the complex structure of the production and development process of the automotive industry, it is often considered to be principally a knowledge based industry. This particular feature can be evidently observed in the leadership operations of Ford Motor Company, which…
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Market structure of Oligopoly
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Market structure of Oligopoly

Download file to see previous pages... Ford’s supply chain also involves a complex pattern including the manufacturing, accessorizing and assembly lines apart from the distribution channel (Ford Motor Company, 2013).
The application of game theory for pricing strategy in the automotive industry is quite significant. In this regard, the Nash equilibrium has a vital role in depicting the pricing strategy of the automotive industry. In Nash equilibrium concept, there are two players mainly column and row, where each player is aware of the equilibrium strategies of the other player. In such equilibrium situation, both the players must change their strategies simultaneously assuming that the change of the strategy by one player will not deliver positive results to the other. This is applied in the automotive industry where pricing can only be developed or changed effectively when all the players agree on the same proposal (Myerson, 2013). The hypothetical profit matrix below will provide a clearer idea to the concept.
As illustrated in the above hypothetical profit matrix, when player 1 tends to adopt strategy A and fix the per product price to 5 units, player 2 also compromises its profit margin by pricing 5 units per product and vice-versa. Again, when player 1 decides to fix its price per unit to 4, player 2 decides to lower its price to 1 and vice-versa, which imposes a strong impact on the profit margin of both the companies. This depicts that in Nash equilibrium situation, the strategies adopted by one player are known to the other player who accordingly makes changes in pricing strategy; thus, leading to a change in the profit margin (Myerson, 2013).
Since there are several firms in the market to sell similar sort of products, low price strategy or high price strategy cannot be implemented for competition in the long run. Therefore, at most of the instances, Ford, being a major player in the oligopolistic market structure, emphasizes ...Download file to see next pagesRead More
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