Gas Wars and Takeaways

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From the course by University of Virginia

Pricing Strategy in Practice

46 ratings

University of Virginia

Pricing Strategy in Practice

46 ratings

Course 4 of 4 in the Specialization Pricing Strategy Optimization

In this project-centered course, Darden's Ron Wilcox and BCG's Thomas Kohler will walk you through a real-world case, from problem statement to detailed analyses. You'll use all three lenses (cost, customer value, and competition) to recommend an optimal price—and then adjust to market disruptions. Utilizing the concepts, tools and techniques taught in previous Specialization courses—from basic techniques of economics to knowledge of customer segments, willingness to pay, and customer decision making to analysis of market prices, share, and industry dynamics—you will practice setting profit maximizing prices to improve price realization. You'll finish the course with a portfolio-building project that demonstrates your pricing prowess.

From the lesson

Curveball

This week, you will respond to new developments in the LED light bulb market: a new competitor and new regulations. Just like in real life, you'll need to adjust your strategy when the competitive landscape changes and new regulations emerge and reconsider the retail marketplace and reevaluate the B2B market. You'll also head out into your own "real world" and do some detective work about the LED bulb market in your area and relate those finding to the case. We'll finish the course with BCG pricing experts sharing their insights into what makes pricing such a rewarding field.

Signaling Games4:24

Extensive Form Signaling Games7:26

Gas Wars and Takeaways4:37

Competitor Pricing Models3:13

Competitive Price Moves: Understand Competitive Dynamics9:11

Competitive Price Moves: Assess Your Options6:15

Competitive Price Moves: Choose and Execute Best Move4:11

Meet the Instructors

Jean Manuel Izaret
Senior Partner and Managing Director, Leader of BCG’s Global Pricing Practice
Ronald T. Wilcox
NewMarket Corporation Professor of Business Administration & Senior Associate Dean for Degree Programs
Marketing
Thomas Kohler
Associate Director, Pricing
Marketing, Sales & Pricing Practice

Now it's good to draw out the extensive form of a game and go throw what we just

went through I think you can get a lot of good intuition from that.

But you don't always have to do that, there are real world situations that

involve signalling games where you can really get an intuition,

the implications of the game, just by looking at some basic prices.

Let's look now at a couple of gas stations.

So these are two gas stations that are right across the street from each other.

They both buy their gas from the same supplier at the same amount of money.

And they're setting their price at 2.29 per gallon at the pump.

Now everything's going along just fine, and they're both making money.

And they're both selling snacks in their convenience stores located next to

the gas station.

Until one day one of the gas stations drops their

price in an aggressive move to $1.99.

Now you can imagine what just happened to the demand for

the gas station that's charging 2.29.

That's 30 cents difference in price.

Their demand is going to go way down.

Now what is that first gas station likely to do?

Well ere's what they might do.

They may drop their price really aggressively.

All the way to $1.79.

Potentially all the way to the point that they are not even making any money.

What are they doing?

They're retaliating against that gas station that cut their price to $1.99.

And they may sit there for a couple of periods, bleeding cash, right.

Neither of them are making a lot of money, but

definitely the 1.79 is making very little money.

They may sit there for a couple of weeks.

And then finally, the other gas station that was originally aggressive says,

you know what this is hurting pretty bad.

I'm going to raise my price to 2.29 again and

what happens with that first gas station?

Then they raise their price to 2.29 again.

What just happened there?

That first gas station sent a signal.

And that signal went like this, if you mess with me, I will mess with you.

And that's an unmistakable signal to that second gas station.

They never got together, talked about price, coordinated, they didn't do that,

that's illegal but they certainly can change prices in a way that sends signals

to their opponent about their future intentions either to cooperate or

punish the other side if they make aggressive behavior.

That's a very simple signaling strategy that I'm sure was very

clear to that second gas station.

Now, what do I really want you to take away from this game theory module?

First of all, know which game you're playing.

Are you really in a prisoner's dilemma game?

Are you or are you not?

Are there really chances for

cooperation there that you might be able to figure out if you play it repeatedly.

If you're in a repeated game,

understand which of your actions are likely to provoke an aggressive response.

That's not something you want.

But figure that out.

That's something that you really want to avoid.

Compete, by all means, compete.

You're supposed to compete.

It's good for businesses to compete.

It's good for the world when businesses compete.

But do not destroy.

Don't try to destroy the other side and

get in a huge fight that can be destructive for both of you.

Not only your profit margins, but your businesses in general.

Stay focused on your profits.

And don't let jealousy cloud your judgement.

And the reason I put that here, everybody, at the end of this module is because

I have seen it so many times in the games that I've played with my students.

It is so easy for that human emotion to rise to the surface, to want to

beat the other side, to be jealous of profits that they have and you don't have.

And when you let that cloud your judgement, you do worse for yourself.

Not just in the arena of pricing, but sometimes in the arena of life as well.

Richard Nixon, Former President of the United States who

famously got into a lot of fights said this, always remember,

others may hate you, but those who hate you don't

win unless you hate them, and then you destroy yourself.

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