Judo Economics

Topics: Profit maximization, Economics, Marketing Pages: 7 (1772 words) Published: November 8, 2010
The Problem is premised on the following phased structure;
| Decision Maker| Decisions To Be Made|
Stage 1| Entrant| Whether to enter or opt out|
Stage 2| Entrant| Set up the price(Pe) and the number of target customers(T)| Stage 3| Incumbent| Whether to fight or accommodate;
1) Price war
2) Set up the price for remaining customers (100-T)|
Stage 4| Buyer| Consumers buy from whoever offers them the highest surplus. There is no cost to capacity. |

The Entrant’s strategy in Q No.1-3 have been chalked out through the technique of “looking forward and reasoning backward” i .e. in the light of what the other party namely Incumbent may do under different circumstances QUESTION 1:

* Each buyer is willing to pay $200 for one unit of either the Incumbent’s (I) or the Entrant’s (E) product * Both I and E have a $100 unit cost
* In view of Stage 2, only buyers targeted by the Entrant can buy there from while the rest can only purchase from the Incumbent * One possibility can be that the Entrant enters, targets the entire 100 customers and is accommodated by the Incumbent so that the products (being substitutes) is equally divided among the customers, with each entrepreneur getting 50% of the market. * On the other hand, if the Entrant targets 100 buyers with a price of $200, it is more likely to lead to price war with both the combatants continually lowering the prices ultimately culminating into either bankruptcy of the Entrant (except if it has enough working capital to sustain) or else reaching a stage where the price equals the unit cost. * A modus Vivendi for the Entrant is resort to segmentation and targeting a certain group even if it entails the denial of the maximum potential profit. In this case the number of target customers AND the price set should such so as not to induce the Incumbent to wage a Price War. * On Incumbent side the profit erosion due to entrance of new competitor must be less than the loss likely to be incurred in case of price war.

Total number of customers---------------- ------------------- 100 Let the customers targeted by the Entrant be------------- T No of customers to be served by the Incumbent--------- 100-T Price set by Entrant------------------------------------------------ Pe Price set by Incumbent------------------------------------------ Pi Unit cost of each (C ) --------------------------------------------- $100

Willingness to pay------------------------------------------------ $200
Profit margin of Entrant--------------------------------------- Pe - 100
Profit margin of Incumbent ---------------------------------- Pi – 100 Incumbent’s and Entrant’s total profit if both target 100 customers -------------------------------- (Pe-100) x 100 --- [1]

Entrant’s total profit if it targets T customers -------- (Pe-100) x T------- [2] Incumbent’s total profit if it targets
100-T customers--------------------------------------- (200-100) x (100-T) --- [3] The Incumbent will be comfortable (i.e. not embark on a price war) only if [1] above is less than or equal to [3] i.e. (Pe-100) x 100 ≤ (200-100) x (100-T)

100Pe -10,000 ≤10,000 – 100T
100Pe -10,000 + 10,000 ≤ 10,000 – 100T + 10,000
100 Pe ≤ 20,000 -100T
Pe ≤ 200 – T
For maximum profit
Pe = 200 –T
Let the profit for the entrant be ∏e, then ∏e = (Pe – C) x T ∏e = (200-T-100)x T
∏e =(100-T) x T
For profit maximization, the relevant value of T can be calculated as under d∏e /dT = (100-T) – T=0
100 -2 T=0
Therefore the maximizing price will be Pe=200 - 50=$150
This means that the maximum payoff for...
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