Producing Complementary Products Samples †MyAssignmenthelp.com

Question: Discuss about the Producing Complementary Products. Answer: The Game Strategy Complementary products are those commodities that are interdependent, where the demand for one product relies on the price of the other commodity. On the other hand, substitute products are similar to rival competitors competing for the attention of the customer. Due to their differences, separate game theories apply to them. First, it is essential to consider whether a particular product in the market is recurring or not. Some companies will produce specific products continuously without an end while others may provide products only once or a few times. Therefore, a game can either be infinitely repeated or one-time based (Dixit and Skeath, 2015, p.352). Companies that are producing complementary products over an extended period will require choosing prices that allow achievement of a Nash equilibrium for the benefits of the two companies. Equilibrium is essential because if one of the complementary producers increases the cost, the demand for both commodities will lower. The custom ers will find it hard to buy the products because of the increased overall price. Substitute products incorporate a different approach. In the one-shot game, a company may be tempted to lower its price if its opponent will raise the same. However, since the rival company anticipates the same reaction as that of their competitors, they will be forced to lower the price to share the profits instead of obtaining a loss. Similarly, in case of repeated infinite sales, these companies should determine what impact the raising of costs in the first sale will have on the future of the business (Dixit and Skeath, 2015, p.363). These producers may secretly collude to agree on prices to tag on their products. However, if one member decides to cheat on the deal, future negative consequences may follow. Profitability depends on the successful planning and playing of these game theories. Incorrect choice of game theory and wrong strategies will cause loss to either one or all companies. For the case of substitute producers, it is essential to achieve a Nash equilibrium in the case of repeated production. For instance, when considering a one-time business, one company may make decisions depending on the speculations of the second manufacturer. If company A decides to increase its prices in the hope that B will do the same, it may suffer significant losses in case company B does not stick to the plan of raising the cost (Dixit and Skeath, 2015, p.357). Therefore, businesses should efficiently plan when to increase or decrease prices. In case of repeated production, a company should evaluate the consequences of lowering their cost to the other companys sales. If such companies agreed to raise their prices, it is vital that they avoid cheating to reduce any future stalemates. Hence, prof its depend on the agreements of businesses and their game strategies. Complimentary markets have a different approach. Since their production is interdependent, gains will depend on the action of both producers. None of the company needs to cheat on an agreement of either increasing or lowering the prices because it will affect them both negatively. If one producer decides to reduce the cost, it will be in the best interest of the complimentary company to do the same to ensure that they do not lose customers. Negotiations for an agreement between unions is similar to that involved in complementary products. The two negotiating parties require meeting an agreeable term for the benefit of the two. If one party negotiates for a higher price at the expense of the other, the negotiations will end in disagreements (Dixit and Skeath, 2015, p.361). Since no party will benefit in case disagreements, negotiations should be directed towards an equilibrium similarly to that in complimentary producers. In an organization offers 120$ for the two parties, the talks should be to decide the best plan for sharing the amount without exceeding the limit. In case of a simultaneous-move game plan, it will be wise for a party to evaluate the likelihood of their opponent choosing a particular amount. However, the best strategy would be to share the amount equally. An example of a pair of substitute product may be between coffee and tea. The two companies may decide to make either simultaneous or colluded decisions in infinitely repeated sales. If the tea company increases the price during the first sale, it may incur losses when the coffee industry lowers the same. This action will force the tea company to decrease their sales cost forever for the rest of the sales which will register low profits for both companies. However, the companies may decide to collude and agree to raise both of their priced to record more gains. Since none of the companies has a reason to cheat in the repeated sales, they may increase their profits at the expense of the customers. Diesel and Lorries are two pairs of complementary products. If a lorry manufacturer lowers the buying price while that of diesel is still high, fewer customers will purchase the two products. Reduction in customers will be as a result of the increased total cost of buying both diesel and the lorry. Therefore, it is wise for both the diesel and the lorry company to lower price to attract more customers since it will cost them less. Similarly, if both companies decide to raise the prices, there should be no producer that violates this agreement because it will lower profits. These two commodities only operate when they are together, which makes a necessity for both producers to agree. One essential point to note is that even in a business that ends after one sale, cooperation is possible to some extent. Each company should take into account the best possible move by the opponent. Since both companies are aware that they have only one shot in a prison dilemma game in this business, they should prioritize the realization of profits (Dixit and Nalebuff, 2008, p.165). Therefore, the companies may cooperate to raise their prices. However, this agreement has its challenges such as cheating due to the lack of punishment. On the other hand, repetition of these sales may provide future cooperation due to an increase in chances of punishment with every increase in the frequency of transactions. When companies interact more, they learn the behaviors of their competitors in business that can give rise to indirect cooperation in fear of punishment or losses (Dixit and Nalebuff, 2008, p.167). The frequency of interaction can also lead to a higher chance of cheating. For instanc e, if a firm realizes that their opponents cannot punish them adequately after disobeying the agreement, such a firm could decide to continue its behavior. The patience of a company to remain in a deal without deviating influences long-term cooperation in the business. Impatient sellers may forsake the contract and decide on a different game plan that can offset the balanced already in place. An example of an appropriate case where the frequency of interaction influence feasibility of cooperation is that of trash-collecting firms in Florida. These companies had set up policies that ensured that any cheating by lowering prices received punishment, which involved taking away about 5 of the firms customers. The opposing firm attracted these customers through the provision of lower prices as compared to the cheating company. After some time, the cheating reduced enabling the renewal of the previous agreements. However, reinstating the agreement did not occur immediately due to the stubborn nature of the cheating firm. The latter first observed the consequence of lying and its effect on the overall business venture. It realized that its actions were causing more harm than good because customers decreased with every instance of cheating. Therefore, the best move was to abandon the act for their survival and the strengthening of their relationship. Bibliography Dixit, A.K., and Nalebuff, B.J., 2008. The Art of Strategy: A Game Theorists Guide to Success in Business and Life (New York: W. W Norton). Dixit, A.K. and Skeath, S., 2015.Games of Strategy: Fourth International Student Edition. WW Norton Company.