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The analysis of a price war strategy under market demand growth

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  • Chang, Ming-Chung
  • Chiu, Yung-Ho

Abstract

We use the finite repeated Prisoners' Dilemma game model herein to discuss how firms choose their optimal strategy under a price war with market demand growth. This model has two players: one is an R-type player and the other is a TFT-type player. Each player has two strategies to choose from: a preemption strategy and a "wait" strategy. Our results indicate that: (i) if the probability that the opponent is an R-type (TFT-type) player is high, then the time when the opponent adopts a preemption strategy will be early (late); (ii) Market demand growth is an incentive for cooperation among firms; (iii) if the market demand growth rate is high, then the R-type player will not have an evolutionary advantage. We use the competition between cell phone manufacturing firms Nokia and Motorola in China as an example. When Nokia is an R-type player and adopts a preemption strategy, Motorola should preferably use a preemption strategy rather than a "wait" strategy. However, as a TFT-type player, this will benefit Motorola under the situation of market demand growth.

Suggested Citation

  • Chang, Ming-Chung & Chiu, Yung-Ho, 2008. "The analysis of a price war strategy under market demand growth," Economic Modelling, Elsevier, vol. 25(5), pages 868-875, September.
    • Handle: RePEc:eee:ecmode:v:25:y:2008:i:5:p:868-875
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