Business Study

Suppose that you were an industry analyst trying to determine if the leading firms in the automobile manufacturing industry are playing a tit-for-tat pricing game. What real world data would you want to examine? What would you consider to be evidence of tit-for-tat pricing?

Evidence of tit-for-tat pricing is easy to find, but hard to prove in the real world that it pricing behavior s were planned between competitors. Analysts can perform periodic pricing reviews to figure out price changing behavior such as companies change price to meet the lowest available price coordination to punish another company. However, it is hard to prove which companies colluded in price changes because they don’t publish this information given that it’s against antitrust laws.

To help determine if price collusion exists, we should collect the following data:

• Determine which companies are in direct competition,

• Determine what car makes and models are true substitutes for each other,

• Determine the frequency of price adjustments, daily, weekly, monthly, or other,

• Gather ongoing pricing data on the selected models at the frequency believed to be the price change frequency,

• Consider other factors that could be related to price adjustments, for example shipping cost fluctuations due to fuel prices, labor disputes, acts of nature (tsunami, hurricane)

Tit-for-tat pricing could be identified by observing price changes happening frequently by one company, and following in the next pricing cycle by other firms.

More sophisticated analysis would involve estimating the cost structures for the firms involved and including that data in a profitability formula.

It is often argued that price wars may be more likely to occur during low demand periods than during high demand periods. (This chapter makes that argument.) Are there factors that might reverse this implication? That is, can you think of reasons why the attractiveness of deviating from cooperative pricing might actually be greater during booms (high demand) than during busts (low demand)?

Pricing strategies such as price wars generally worsen the market, rather than strengthen it. During high demand periods, companies can get more benefits in the dominant market share situation, which means gaining

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