The objective is to “run them out of the market”. It is a poor strategy given that there is a price inelasticity of demand so competing in prices is hurting performance at the expense of share. Moreover, it is a usual practice in San Huberto for importers to divide their order between both shipping lines, so lowering prices makes it even riskier since it is more difficult to run them off the market.
2. What are the key assumptions behind the "Contribution Matrix" in Exhibit 4 of the case? How reasonable are these assumptions given the market information that James Vaughan has been able to gather? Given the assumptions, does the matrix reflect the correct objective functions (i.e. what should be maximized) for the two firms?
The game is played only once. Best objective for LAL : KL@1900 – LAL@1600 Best objective for KL: KL@1700 – LAL@1900
3. If the values in the Contribution Matrix are, in fact, reasonable, what action would you recommend to LAL management? How should they actually implement your recommendation?
According to the contribution matrix there is an equilibrium at KL@1400 – LAL @1300 (1008, 895). At this prices, they would both have 50% mkt share. If the game is played once and KL sets price at 800, LAL’s best movement is to respond with 1100 (-291, 101). LAL will lose mkt. share but it would still get positive profits whereas KL is gaining mkt share at the expense of its finance. This would not be sustainable in the long run and KL would be force to choose another price given that LAL has price set at 1100. It would be be best if LAL could talk to the people from KL and decide on the price or else set unilaterally price at 1300 and wait that KL realize that in order to maximize their benefits its best strategy is to set price at...