New Entry to the Market and Game Theory

Consider a firm that is contemplating entry into a vernal market. What contribution, if any, can game system make to the analysis of the economic viability of such a strategy? Refer to the critical time line, reaction moulds and the Nash premise in your reply. Introduction Management decisions leave out the full information, so they be bounded rationality decisions. Companies are players in a game, and the game dimensions are defined in terms of geographics and product. So any new dispatcher leave behind try to enter the market he go forth play a game in two dimensions geography and product (example Apple entering the smart phone market).The entrant has to decrease its price from the market price so he can guarantee a portion of the market share (steal market share from the incumbents). The incumbents have two options either to compete or to accommodate. We introduce the principles of the Game Theory as follows scathing Timeline Management can observe behaviour as signals an d as patterns in the signals. Patterns do emerge in the observed behaviour, patterns in price movements or patterns to do with achieving growth through acquisition. The patterns create a critical timeline (CTL) of observed actions and as the CTL unfolds, it reveals a strategy.The new entrant has to observe these patterns and management types of the incumbents everywhere a vast CTL, to forecast their reaction to his entry, is it going to be a competitive or kind reaction. Incumbents for sure faced previous entrants with some kind of reaction when they seek entry, the new entrant can study and analyze this CTL to forecast the possible reaction of the incumbents especially that firms management usually they repeat their type over and over again especially when it succeeds.Reaction functions When the new entrant testament enter the market, the reaction from the incumbents entrust be either passive (Cournot set) to balance the quantity in the market, i. e. to align his output so that both firms produce the market need and they both sell all their output so that the price will not go raven and the profit does not go down as well. Or, the reaction will be aggressive (Bertnard model) by cutting the price of the new entrant and accordingly start a price war. 1) Cournot model reaction functionIn this case, the incumbent will call in this way since the entrant entered the market and already chose a price. If I choose to cut price and enter a price war we will all end up in blemish (profit is nil), so the best reaction is to choose an output that will guarantee me a profit-maximizing given the entrants output. So after the entrant enters, the incumbent will decrease his output as per the Reaction Function diagram shown below. Because the incumbent thinks if he increases his output past the market price will go down and profit will go down with it.Knowledge of the market here is crucial, to piss this profit-maximizing condition the market has to be in which f irms must make merchandise decisions in advance, are committed to selling all their output. This might occur in the majority of production costs are sunk or it is pricey to hold inventories, in this environment firms will do all what it takes to sell all its output. The Cournot equilibrium here makes positive profit for the firms. 2) Bertnard model reaction functionIn this case, the entrant when enters the market will enter in a lower price than incumbents to steal their customers and grant a market share for himself. The incumbents will react by reducing the price even more and the rivalry between the firms will go on and will result in a perfectly competitive outcome. In this condition the competition will be fierce because the products are perfect substitutes. If the products are differentiated, price competition is less intense. (Besanko 2010).In this Bertnard model the capacity is not constant as in Cournot. This model pertains to markets in which capacity is flexible that fi rms can meet all of the demand that arises at the prices they announce. If firms products are perfect substitutes, then each Bertnard competitor believes that it can steal massive amounts of business from its competitors through a small cut in price, when all competitors think this way, in equilibrium, price-cost margins and profits are driven to zero (Besanko 2010)The diagram below shows the Bertnard Reaction function when products are differentiated where both firms reach a Bertnard equipoise that are well above marginal cost and so they both make profit, if their products are perfect substitutes to each other then the price will be driven to marginal cost and profit will be zero. Nash Premise If the incumbents chose the non accommodative come along then either they will reach the zero profit situation if the products are perfect substitutes, or they might reach an equilibrium (Nash) if the products are somehow horizontally differentiated.Nash Equilibrium is reached when both fi rms reach a situation when each of them chose a strategy and no one can benefit by changing his strategy while the other players keep their unchanged, then the current set of strategy choices and the corresponding payoffs constitute a Nash equilibrium. i. e. dissolute 1 making the best decision it can, taking into account Firm 2s decision, and Firm 2 making the best decision it can, taking into account Firm 1s decision. (Wikipedia. com) ExampleBeef-processing industry in the US, there were 4 industry leaders, then came JBS SA from southeastward America and purchased Swift & Co. to form JBS Swift & Co. then the quantity produced increased (excess capacity). Capacity had to drop otherwise the outlook would remain bleak. Tyson decided to close its grinder at Emporia, Kansas pulling 4000 head of capacity from the market. After this closure the capacity and the beef prices have stabilized. (Besanko 2010) We can see in this example how when a new entrant emerged (JBS Swift & Co. ) the capacity increased caused the prices to drop.We conclude that the market capacity here is fixed (Cournot model) and when the incumbents saw that effect they knew for fact that reducing the output will benefit everybody. So, Tyson Co. closed one of its factories, the total output in the market dropped caused the prices to stabilize again. Here this is a kind of Cournot equilibrium that is reached. The incumbents went through an accommodative approach in this case rather than competitive. Conclusion The entrant has to observe closely the Critical Timeline of the markets incumbents before entering this market.According to his forecast of their reaction (whether it will be accommodative or competitive) he has to build his strategy whether he can survive or not. The entrant has to study the market demand (capacity), is it going to be touch on by the new entry by absorbing the extra quantity (can lead to Bertnard) or the demand is fixed (that can lead to Cournot). The entrants strategy h ad to be built on the Reaction Functions forecasted from the incumbents where from there the entrant can calculate the Nash equilibrium value and the possibility to reach it or the other possibility to reach the zero profit condition.