Walmart and Target a Closer Look at Strategic Interaction

Main Paper Walmart and bulls eye A closer look at strategic inter recreateion Maastricht University School of commerce and scotchs Maastricht, 4th December 2011 Bastian Hauk, BH ID number i6034999 Study International ancestry Course Code EBC1009 Economics & Business Group Number 31 Economics Tutor Khan Writing Tutor Hetty Bennink Writing fitting Main Paper Table of Contents Page 1. Introduction 2. Economic Principle spunky Theory 3. apply Economic Principles 3. 1. Theory of Game for at the same time finality Making 3. 2. The extended Version for consecutive Decision Making 4. Conclusion References 4 6 7 8 2 2 1 Introduction In the United States of America in that respect are only two very well- agnizen discount retailers scar and Walmart. Both are currently operating all over the dry land which places each of them among the biggest corporations in the United States. Nearly every American has been to at least wiz of them because they sell more or less everything and E. Basker described this service one-stop shop (2007). In 2007, Walmart operated more than 3,400 entrepots across the USA and a survey raiseed that by the end of 2005 46 percentage of Americans lived within 5 miles of the nearest store within 15 miles even 88 percent (Basker, 2007). tail end operated 1,750 stores in January 2011 ( bespeak Corp. , 2011). Since their entire range of products is quite similar they are Brobdingnagian competitors. Thus, they are forever and a day waging bell war a crystallizest each new(prenominal). In addition, they sword use of strategic interaction and especially of biz scheme which is a mathematical ideal describing a decision reservation process and showing how the histrions make contrastive decisions that potentially expunge each others interests (von Stenge, & Turocy, 2001). This paper analyses strategic interaction between Walmart and laughingstock with respect to the game feasible action and the extended interpreting.In order t o do so it introduces first the theoretic background of strategic interaction. Afterwards it applies game theory and the extended version to this case in order to show the impact of strategic interaction on some(prenominal) discount retailers. It concludes by stating the importance of strategic interaction to optimal decision making and its relevancy for Walmart and Target. 2 Economic principles game theory and extended version The theory of games describes certain concepts in which several players influence each others decisions in situations of conflict and competition (Moffatt, 2011).In order to apply game theory there must be at least two players. The tercet basic elements of a game are the player, the strategies he can submit from and the consequences the players receive from each conclave of scheme. The payoff matrix describes the events in a certain game for each achievable combination of strategies as shown in Figure 2. 1. 2 imposter One dodge 1 Strategy 1 endpoin t Player 1 Strategy 2 force Player 1 Outcome Player Two Strategy 2 Player 2 Outcome Player 1 Outcome Player 2 Outcome Player 1 Outcome Player 2 Figure 2. 1 Payoff matrix for a two player game Outcome Player 2If one player used a superior strategy, his choice yields a higher(prenominal) payoff, regardless what the other player does and as a result he has no incentive to mixture his strategy. For this suit, player ones dominant strategy would be strategy one if he received a higher outcome no matter which strategy player two chooses, but only if he then receives the highest payout. There are also some particular outcomes for exercise the Nash counterweight which occurs when all combination of strategies is the scoop up strategy with the top hat realistic outcome for all players (McDowell, Thom, Frank, & Bernanke, 009). An outcome created by two dominant strategies which is worsened than the outcome created by two dominated strategies is called prisoners dilemma. The prisone rs dilemma only occurs when each players dominant strategy results in a smaller payoff than it would save if they had chosen the dominated strategy. Game theory also assumes that the decisions are made simultaneously. To instance a game in which the players decide interdependent, the economist uses the extended version of game theory which is displayed with a game tree (McDowell, Thom, Frank, & Bernanke, 2009). Company 1 Decision natural action A or implement B Action A Company 2 Decision Action C or Action D Action C Outcome 1 Outcome 2 Action D Action B Company 2 Decision Action C or Action D Action C Outcome 3 Outcome 4 Action D Figure 2. 2 Decision tree Figure 2. 2 is an example of a game tree. Company 1 first decides which action they testament take, which can be either A or B. Company 2 then has the choice how they want to play off and whether they take action C or D. The best outcome can only be achieved with a backward nduction as a result of evaluating the results f irst and later predicting the other players strategy. For example, outcome 3 would be the best outcome for company 2 if company 1 chose action B and consequently company 2 chooses action C. Outcome 2 would gain the highest moolah for company 2 if company 1 took action A. 3 Applied Economic Principles 3. 1 Theory of game for simultaneously decision making As stated in the introduction this two very lifesize American retailers are competitors and have a very similar guest base.The income of Targets customer base is slightly higher but it is not applicable for strategic interaction (Neuman, 2011). Theory of game helps to understand the different worths and how the different equipment casualty strategies affect consumer behavior. This example is not based on any specific data. However, it is logic for somebody willing to buy a certain good to substitute the same good with an identical one if the scathe is littleer and there are not any additional efforts to make. By applying g ame theory, the three basic elements have to be clear. 4 Walmart and Target are the players.Different determine of a certain product -a television- are the strategies man the different lucres are the results of each combination of the strategies. Both companies have two pricing strategies either to charge a humbled equipment casualty of 300 or a high price of 500. They have to make the decision simultaneously, for instance before they release the television to the market. It is important to know that the customers are also willing to purchase the television for the high price. Target High harm (500) High bell (500) Walmart Walmart earns 10,000 return Low Price (300) Walmart earns 15,000 profit Figure 3. Payoff matrix for Walmart and Target Figure 3. 1 shows a potential payoff matrix for this strategic interaction. It shows all possible outcomes for the two pricing strategies. Walmart and Target would both make 10,000 profit if they charged the high price and 7,500 profit if they charged the miserable price. If Walmart chose the minor pricing strategy and Target used the high pricing strategy Walmart would gain 15,000 compared to the 5,000 profit Target would make. Target also makes 15,000 profit using the broken price if Walmart decides to charge the high price.What does that mean for both companies? Since both of them would earn a higher profit by setting the price low in this scenario, both companies would choose Low Price as a dominant strategy. On the contrary, High Price would be the dominated strategy. Nash equilibrium can be found when both companies pick the low price strategy because they dont have an incentive to change their strategy. This payoff 5 Low (300) Target earns 15,000 profit Walmart earns 5,000 profit Target earns 7,500 profit Walmart earns 7,500 profitTarget earns 10,000 profit Target earns 5,000 profit matrix also shows that the strategy combination of high price and high price would be the best possible outcome for both fi rms. But rather than applying the dominated strategy Walmart and Target use the dominant strategy. This dilemma is called prisoners dilemma. Those dilemmas exist quite frequently and there are many reasons why they exist, for instance, both companies do not want the other one to make a higher profit or even to have the chance to receive a higher profit. 3. 2.The extended version for consecutive decision making consequently Target and Walmart react and might change the strategy they had choosen. Both competitors often change their strategies. Although Singh (2006) stated that prices at Walmart are about 15 percent lower than in traditional supermarkets, Neuman (2011) proved by comparing almost 60 items that Targets prices were a bit lower than Walmarts. It is expectant to rely on data which are released with a 5 family time difference but it shows that both firms constantly adjust the prices to be competitive.High Price Target High Price Walmart Low Price 10,000 for Target 10,000 for Walmart 15,000 for Target 5,000 for Walmart 5,000 for Target 15,000 for Walmart 7,500 for Target 7,500 for Walmart High Price Low Price Target Low Price Figure 3. 2 Decision steer for Walmart and Target 6 Since the decisions of both companies are not made simultaneously the reacting firm -in this case Target- has to find out what action to take in order to receive the highest profit for either move Walmart makes. Walmart moves first and selects either strategy.Target is in the position to decide and how it wants to react. Thus, Target uses backward induction. First it evaluates the best results for each action Walmart uses 15,000 profit if Walmart sets a high price and 7,500 profit if Walmart sets a low price. Afterwards it chooses the strategy how to get to that profit. Finally Walmart moves and selects the low or the high price strategy and Target is able to react sufficiently. Assume that Walmart chooses the high price strategy then Target sets low prices and due to that Ta rget earns the highest possible profit. Conclusion Walmart and Target are large competitors on the American retailer market and therefore strategic interaction is very important for them. Both companies know the ways to decide how to act concerning different strategies. Both companies know that it is necessary for them to react and choose the best strategy. In the first example both companies simultaneously introduce a television to the market. Their dominant strategy is to set a low price because both of them hope that the other company chooses the high price strategy.This is one example of a free market wherein the customers unendingly choose the low price if available. Walmart and Target would earn a larger profit if both set the high price. In the other case Walmart moves first and afterwards Target chooses the strategy which leads to the highest outcome. The reacting companys best strategy in the extended version of game theory is always the low price strategy. On the contrary , when two companies have to decide simultaneously it is not always the best choice to choose the low price strategy although it is their dominant strategy. References Basker, E. (2007). The Causes and Consequences of Wal-Marts Growth. The Journal of Economic Perspectives, 21 (3), 177-198. McDowell, M. , Thom, R. , Frank, R. , & Bernanke, B. (2009). Principles of Economics, 2nd European Edition. Maidenhead, UK McGraw-Hill Education. Moffatt, M. (2008). What are Game Theory and Bargaining Theory? Retrieved December 4, 2011, from http//economics. about. com/cs/studentresources/f/game_theory. htm Neuman, S. (2011). Target Takes Aim At Walmart, With Some Success, NPR. Retrieved December 4, 2011, from http//www. pr. org/2011/08/19/139793948/target-takes-aim-at-walmartwith-some-success Singh, V. , Hansen, K. , & Blattberg, R. (2006). A Market Entry and Consumer Behavior An investigation of a Wal-Mart Supercenter. Marketing Science, 25 (5), 457-476 Target Corp. (2011). Target Annual Report 2010. Minnesota, US Target. Retrieved December 7, 2011 from http//www. sec. gov/ account/edgar/data/27419/000104746911002032/a2201861z10k. htmbg11101a_main_toc Turocy, T. L, von Stenge, B (2001). Game Theory. Academic Press Limited, 2 (2), 69-73. 10. 1080/07430170152379371 inside 8