The Market Behavior:

December 28, 2012 — Deja un comentario

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.
You might consider that consumers will choose the company that brings them more benefit taking into account certain factors.
The questions would be: what decisions do I make as a company? Which factors are more relevant for consumers? How do I get an advantage from my competition? How do I react to my competitor´s moves?
So to answer these questions we developed a model that is a simplified representation of a dynamic market, with the following assumptions:
  • 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.
You can try the model we developed here:



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