Collective Action Problem Essay

Problem Statement: – Competitors Coca- cola and Pepsi-cola have to decide whether or not to offer discount pricing. Matrix:-    Pepsi – cola    Coca- cola Pricing Strategy Discount price Regular price Discount price $4b,   $2b $8b,   $1b Regular price $2b,   $5b $6b,   $4b * b means billion    Description: – Both companies can choose one outcome by offering a discount price or a regular price. The payoff for each firm depends upon the pricing strategies of both firms.     For coca- cola the worst case scenario is $2 billion payoff when it offers regular prices while Pepsi-Cola charges discount prices. Similarly, for Pepsi- Cola the worst case scenario is $1 billion. Solution: – A dilemma is involved because each party would like to have maximum benefits by offering the discount and hoping that the other doesn’t.   The only secure means both companies have of avoiding meager profits is to offer discount prices. The ideal scenario would have been when both were offering regular price as they would have earned $6 billion (Coca- cola) and $4 billion (Pepsi-Cola). But, it’s difficult to trust each other and thus, they both go for the conservative strategy and settle down for profits of $4 billion and $2 billion for Coca-cola and Pepsi-Cola respectively.