Price Wars Computer Electronics, Inc. (CE) and the Gigantic Computer Store (GCS) are planning to discount the price they charge for the HAL laptop computer, of which they are the only distributors. Because Computer Electronics provides a free warranty service, it can generally afford to charge more. A market survey provides the following data on the gains to CE’s market share that will result from different pricing decisions:
GCS | ||||
CE | $900 | $1,000 | $1,200 | |
$1,000 | 15% | 60% | 80% | |
$1,200 | 15% | 60% | 60% | |
$1,300 | 10% | 20% | 40% |
a. Use reduction by dominance to determine how much each company should charge. What is the effect on CE’s market share?
b. CE, which knows that GCS is planning to use reduction by dominance to determine its pricing policy, wants its own market share to be as large as possible. What effect, if any, would the information about GCS have on CE’s best strategy?
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