Target Corporation Stores are almost the oddest places on Earth in that you go in there for one thing and usually come out with two...and this digression has nothing to do at all with what I am about to talk about but it is interesting and this has nothing to do with Target at all either except for tacitly at the beginning.

I have a wireless keyboard and mouse and needed batteries for the set and the keyboard takes AAA while the mouse take AA. I never really thought about this when I was at Target, ie working there but in class as we were talking about Nash Equillibrium it really clicked in the pricing strategy that Energizer and Duracell are using.

What I noticed that I did not really think about prior was the use sales prices in there market strategy and who this not only creates a perfectly competitive Duopolistic environment, but is also a Nash Equillibrium, but is also a massive entry barrier and market dominator prenting competition from entering the market and benefits the consumer as much as the producers in this lack of competition environment.

Okay now, I am very excited about this but let me begin to explain myself...

For however long Duracell and Energizer were bitter rivals to whatever degree and there were always other competitors in this market doing whatever... including taking some percentage of sales whatever that percentage is. At some point the bitter rivalry seems to have subsided and an odd non-competitive equally beneficial to both companies and beneficial to the consumer all the same took place and both companies have probably benefiteed.

Here is how it probably went at some point and then I will try to explain the particulars of the market...

At some point signalling took place between E and D. Some times signalling can be a bad thing in the perspective of collusion of course but in this case it was a good thing. The signalling was this, E and D would alternate sales on either product per week in order to both maximize sales and stop the competitive environment that usually does end up costing both comanies massive amounts of sales. The signalling was every other week E would put their batteries on sale and the alternating week D would put their batteries on sale for the same price. Some may think why is this a good thing...

Think about it this way, say both companies are directly competing on prices... what happens is that both companies are directly competing on prices and they are both losing. When one puts their products on sale the other put their products on sale and they advertise this price cut in some way and the consumer finds out and their sales increase at a time when both are garnering less profit on batteries and thus they are losing. The benefit goes to the consumer in this case and the companies are losing a profit or gaining depending on economies of scale...the important thing is that they cannot keep this behavior up constantly because that would be setting a new price point and giving competition and entrance...why...because at whatever price point they take economies of scale in some way positive or negative are going to enter and there is going to be profit in the market or loss and the companies are going to have to either lose inovation money are there is going to be enough profit for at least another company to enter.

How does this work...well, say they do not put their products on sale at all, then there is definitely going to be R&D money but there is also going to be excessive profit in the market and thus incentive for another company to enter the market...that is a price maximization market. If the companies are continuously ocmpeting on price then they are accepting lower profits and are losing R&D money and thus are only able to innovate within production and the consumer can see very little profit. This is quantity maximization.

They key in there is that there is near perfect homogonization but not complete homogonization in every consumers mind and it still is profit maximization behavior on price.

Everyone should know that there is no perfect price at which everyone prefers to pay over every other price. It should also be known that confusion in the consumers mind creates inefficiences in the market. When there are alternating sales, what the E and D are doing is saying this, we know that prices do vary over a market and we respect that. We are going to offer two prices over the market. One is a sale price for consumers who do not have a brand preference and just rely on the fact that they are going for the cheapest price. We also know that certain parts of the market prefer either E or D in the market and will choose them no matter what the price is. Since batteries tend to run out at odd times for some, they are going to go to the store and by their preference no matter what and for whomever the choose, either E or D, that company is going to benefit from the higher price. Not all consumers think ahead and a preferenced consumer would be less likely to think ahead and buy them when they are on sale. So the company with the more preferred product is essentially going to get a preferred market share giving them incentive to differentiate their product...thus the company is going to put money to R&D and they are also going to advertise separately.

For the average consumer though, they are getting a lowered non-competitive price point with no losses due to price point competition in the market. The price seeking consumer is getting the price that they want. The preferenced consumer is getting the preference that they want...but how does this benefit the companies and how does this create and entry barrier.

The way this works is that both companies have at least to some point differentiation in their name in the very least in that they do have a different name. The fact that one or the other constantly has a sale price combines the efforts of both companies against new entrants into the market and those of a lesser name either have to lower their price below the sale price of E and D and thus stands a chance of losing more money or they have try and compete by name thus having to beat the names of both long standing companies. Essentially both companies have said this...we have maximized this market to its near peak and are satisfied that E cannot put D out of business and vice versa. We are satisfied also that if we do not offer a price better to consumers we are creating an anti-competitive market and thus either give a third competitor the chance to enter or we risk severe reprisal from the governing agencies...ask the cereal companeis about this.

What we are going to do is take the consumer surplus and basically split it with whatever company has the better name getting a percentage above 25% of the consumer surplus and the opposing company getting lower then 25% consumer surplus. The consumers get the other 50% of the consumer surplus. This is going to vary on both how preference the market is and how what percentage of the population prefers price over quality.

This is a Nash Equillibrium because we cannot really get a better position in the market. When the choices are price or quantity or competition , and with that risking government reprisal for an uncompetitive market behavior, competition, then the best choice is to say that the market is good enough the way it is and take the additional R&D money and continue to try to differentiate and come up with new products but also to give some of the benefits back to the consumer.

The competition between E and D would be very costly to both companies and would realistically set both companies back but in this case, they are splitting the market and giving some of it back to the consumer. They are probably competing in other markets that are more profitable or they have a monopolistic environment in and they are reaping the beneifts there.

In this instance it is the best of all worlds in a competitive environment because the companies have the ability to actually gain information on the consumer by their behaviors in the market and should be able to set the maximized price for the market that reaps the most benefit from it. By looking and deviations in sales, they are able to garner more information then usual because the have a definite know market share that they are going for and thus deviations from that tell how preferenced the market is for their product over another. Introduction of new goods onto the market tells how sated the consumer is with the products currently on the market are and thus gives you a distinct direction on where the company should go. Not only that but by applying a standard normal distribution over the sales when on sale the companies can tell nearly exactly what percentage of consumers prefer their products over the other. The are inducing knowledge to the consumer in order for them to garner more knowledge in the end.

 

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