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).
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:
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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.