Assuming Company ABC currently holds the largest market share in a town, making it the dominant player. Its only competitor, Company XYZ, sells a similar product but has a smaller market share. Presently, ABC earns a profit of $1,800, while XYZ earns $1,200.
ABC is now confronted with a challenge: its rival, XYZ, is signaling a potential price reduction to attract more customers. ABC has two strategic options: lower its price or maintain the price. If ABC reduces its price before XYZ does, it could potentially increase its profit to $2,000, while XYZ might see its profit halve. However, if both ABC and XYZ lower their prices, leading to a price war, ABC’s profit could drop by $200, and XYZ’s profit could decrease by $300.
On the other hand, if ABC chooses to retain its current pricing while XYZ reduces its price, ABC’s profit might decline to $1,300. Meanwhile, XYZ could potentially attract more customers and increase its profit to approximately $1,500.
Illustrate the market scenarios of two firms with two possible options by a game matrix.