New Entry to the Market and Game Theory

Topics: Game theory, Nash equilibrium, Competition Pages: 4 (1203 words) Published: November 20, 2012
Consider a firm that is contemplating entry into a new market. What contribution, if any, can game theory make to the analysis of the economic viability of such a strategy? Refer to the critical time line, reaction functions and the Nash premise in your reply.

Introduction:

Management decisions lack the full information, so they are bounded rationality decisions.

Companies are players in a game, and the game dimensions are defined in terms of geography and product. So any new entrant will try to enter the market he will play a game in two dimensions geography and product (example Apple entering the smart phone market).

The entrant has to decrease its price from the market price so he can guarantee a portion of the market share (steal market share from the incumbents).

The incumbents have two options: either to compete or to accommodate.

We introduce the principles of the Game Theory as follows:

Critical Timeline:
Management can observe behaviour as signals and as patterns in the signals.

Patterns do emerge in the observed behaviour, patterns in price movements or patterns to do with achieving growth through acquisition. The patterns create a critical timeline (CTL) of observed actions and as the CTL unfolds, it reveals a strategy.

The new entrant has to observe these patterns and management types of the incumbents over a considerable CTL, to forecast their reaction to his entry, is it going to be a competitive or accommodative reaction.

Incumbents for sure faced previous entrants with some kind of reaction when they tried entry, the new entrant can study and analyze this CTL to forecast the possible reaction of the incumbents especially that firms management usually they repeat their type over and over again especially when it succeeds.

Reaction functions:

When the new entrant will enter the market, the reaction from the incumbents will be either passive (Cournot model) to balance the quantity in the market, i.e. to adjust...
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