Game Theory in Pricing

Pricing Chess: Predicting Your Competitor’s Moves

Don’t just set prices. Play the game strategically.

1. Identify the Players:

• Who are your main competitors for this product/service?
• What are their core objectives? (e.g., market share, profit, growth)

2. List Your Strategies:

• What are your possible pricing moves? (e.g., raise price, cut price, hold price, run promotion).

3. Predict Their Payoffs (and Yours):

• For each combination of your move + their likely response, what’s the outcome for you and for them? (e.g., If I cut price and they cut price, we both lose. If I cut and they hold, I win big).
• Tip: Create a simple 2x2 matrix to visualize this.

4. Look for the “Nash Equilibrium”:

• Is there a stable outcome where neither you nor your competitor wants to change your strategy, given the other’s choice?
• Example: In a “Prisoner’s Dilemma” price war, the Nash Equilibrium is often both cutting prices, even though both would be better off at high prices.

5. What’s Your Best “Safe” Bet? (Dominant Strategy)

• Is there a move that is best for you, regardless of what your competitor does?

Golden Rule: Don’t assume your competitor will act irrationally. Assume they are just as smart and strategic as you are, and design your pricing with their likely reaction in mind.