Thinking About Price Setting

Let’s begin by analyzing the dynamics of price cutting. You are the head of an established firm, Amass You open your browser and discover that new books, ari upstart Internet bookseller, has an advertisement .that says. “We sell for 10 percent less.” Figure 11-3 shows the dynamics .. The vertical blue arrows show new books price cuts; the horizontal blue arrows show Amazing’s responding strategy of matching each price cut. .

By tracing through the pattern of reaction and counter reaction, you can see that this kind of rivalry will end in mutual ruin at a zero price. Why? Because the only price compatible with. both strategies is a price of zero: 90 ·percent of zero is zero. Your rival finally realizes that when it cuts its price, you will match the price cuts. Only if you are shortsighted will you think you can undercut new books for long. You will then start to ask what new books will do if you charge price A. price B, and so forth. Once you to consider how others to actions, you have the realm of me theory.

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