Price wall or war: The pricing strategies for retailers

Chun Hung Chiu, Tsan Ming Choi, Duan Li

Research output: Journal article publicationJournal articleAcademic researchpeer-review

42 Citations (Scopus)

Abstract

In this paper, we apply the game theory to study some strategic actions for retailers to fight a price war. We start by modeling a noncooperative pure pricing game among multiple competing retailers who sell a certain branded product under price-dependent stochastic demands. A unique Nash equilibrium is proven to exist under some mild conditions. We demonstrate mathematically the incentives for retailers to start a price war. Based on a strategic framework via the game theory, we illustrate the use of service level to build price walls which can prevent a huge drop in price, as well as profit. Three kinds of price walls are proposed, and the respective strengths and weaknesses have been studied. Analytical conditions, under which a price wall can effectively prevent big drops in both market share and profit, are developed. Aside from the proposed price walls, two other pricing strategies, which can lead to an all-win situation, are examined.
Original languageEnglish
Pages (from-to)331-343
Number of pages13
JournalIEEE Transactions on Systems, Man, and Cybernetics Part A:Systems and Humans
Volume39
Issue number2
DOIs
Publication statusPublished - 18 Mar 2009

Keywords

  • Game theory
  • Price war
  • Pricing game
  • Retailing
  • Service level

ASJC Scopus subject areas

  • Software
  • Control and Systems Engineering
  • Human-Computer Interaction
  • Computer Science Applications
  • Electrical and Electronic Engineering

Cite this