Applying Game Theory To Strategy

Imagine that you own a pharmacy in your area. One of your competitors launches a “We will not be undersold” campaign, which promises consumers 150 % of any difference between its prices and the advertised prices of other pharmacies. Evaluate the social issues in your community as well as the economic culture that is influencing this type of pricing competition. Develop and describe a microeconomic model that is responsive to the service demands of your market. Based on your conclusions, how would you react to this situation and with what business strategy would you approach this? How might you apply game theory to the creation of your strategy?

Helpful Articles

Levaggi, L., & Levaggi, R. (2010). Strategic costs and preferences revelation in the allocation of resources for health care. International Journal of Health Care Finance and Economics, 10(3), 239-256. doi:http://dx.doi.org.proxy-library.ashford.edu/10.1007/s10754-010-9079-x. Retrieved from the EBSCOhost database.
This article examines the resources allocation process in the internal market for health care in an environment characterized by asymmetry of information. We analyze the strategic behavior of the provider and show how, by misreporting its cost function and reservation utility, it might shift the allocation of resources away from the purchaser’s objectives (Levaggi & Levaggi, 2010).

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Sample Answer

Evaluating the “We Will Not Be Undersold” Campaign

Social Issues and Economic Culture

The “We Will Not Be Undersold” campaign is likely to have a significant impact on the local pharmacy market, as it could lead to price wars and potential closures of smaller pharmacies. This could negatively impact consumers who rely on these smaller pharmacies for their healthcare needs, particularly in underserved communities.

The campaign also reflects a broader culture of consumerism and competition, where businesses are constantly trying to outdo each other and gain market share. This can lead to a focus on short-term gains at the expense of long-term sustainability and the well-being of the community.

Microeconomic Model

A simple microeconomic model of the pharmacy market could include:

  • Demand: The demand for prescription drugs is likely to be inelastic, meaning that consumers are not very sensitive to price changes. This is because they often need these drugs to manage chronic conditions or other health issues.

Full Answer Section

  • Supply: The supply of prescription drugs is determined by the number of pharmacies in the market and the wholesale prices of the drugs. The “We Will Not Be Undersold” campaign could lead to a decrease in the number of pharmacies, as some may not be able to compete with the lower prices.

  • Price Competition: The campaign could lead to a price war, where pharmacies continuously undercut each other’s prices. This could lead to lower profits for all pharmacies, and some may be forced to close their doors.

Responding to the Campaign

As a pharmacy owner facing this situation, I would need to carefully consider my response strategy. Here are some options to consider:

  • Matching the Competitor’s Prices: Matching the competitor’s prices could help maintain market share, but it could also lead to lower profits.

  • Focusing on Differentiation: Instead of competing solely on price, the pharmacy could focus on differentiating itself from its competitors through factors such as customer service, convenience, or specialized services.

  • Targeting a Specific Niche: The pharmacy could focus on a specific niche market, such as providing care for a particular patient population or offering specialized services.

Game Theory

Game theory can be applied to this situation to analyze the strategic interactions between the pharmacies. For example, the pharmacies could consider the following strategies:

  • Price Matching: Each pharmacy could match the prices of the other pharmacies, leading to a stable equilibrium where all pharmacies charge the same price.

  • Price Wars: If one pharmacy starts a price war, the other pharmacies may be forced to follow suit in order to maintain market share. This could lead to a downward spiral of prices and lower profits for all pharmacies.

  • Differentiation: Pharmacies could differentiate themselves from each other by focusing on different aspects of their business, such as customer service, convenience, or specialized services. This could lead to a more stable market with less price competition.

Conclusion

The “We Will Not Be Undersold” campaign is a challenge for pharmacies in the local market, but it also presents an opportunity for strategic thinking and differentiation. By carefully considering the social issues, economic culture, and microeconomic dynamics of the market, pharmacies can develop a response strategy that protects their business and serves the community. Game theory can provide a useful framework for analyzing the strategic interactions between pharmacies and developing a winning strategy.

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