What if you are a company competing in a challenging market. You would have to make decisions in order to increase your profit and the amount of sales.
- There is one product sold by multiple companies that are price-setters ( 0.1≤ Price≤1 ).
- Each company produces according to demand, they don’t stock product.
- Each company decides to produce the product with a certain level of quality (1≤ Quality ≤10 ).
- A company´s initial price and quality is randomly assigned according to a uniform distribution within the range.
- The company´s variable cost increases with the square of the quality it produces.
- All companies have the same fixed costs.
- All companies have a target market share according to:
Target Mkt.Sh.= 1.15×(∑ consumer)/(∑company)
- A company’s state is discretely defined by two variables: profit and market share.
- There are four possible states for a company:
- Star: Profit > 0 and Mkt. Sh. > Target Mkt. Sh.
- Cash-Cow: Profit < 0 and Mkt. Sh. > Target Mkt. Sh.
- Question Mark: Profit > 0 and Mkt. Sh. < Target Mkt. Sh.
- Dog: Profit < 0 and Mkt. Sh. < Target Mkt. Sh.
- Each company will follow one of two set strategies: price-driven competition and quality-driven competition.
- Each user agent consumes only one product.
- The product a user consumes is chosen to maximize his utility function.
- The utility function for each consumer is:
- U(P,Q)=P^α Q^(1-α) P: price, Q: quality
- Users’ α parameter are distributed according to a uniform distribution between [0,1]
- Users continually reevaluate the utility of all products in the market and adjust their consumption decision.
- In the model you may choose the amount of companies that are competing on the market.
While proving the model you might notice that:
- Under the specified assumptions, the price strategy trumps the quality strategy.
- There is a better chance of higher consumption diversity when the market has fewer companies.
- The higher the competition the lower the profits.