Ashford 7 Week 6 Discussion 1 Your Initial Discussion 556642

Ashford 7 Week 6 Discussion 1your Initial Discussion Thread Is Du

Suppose that GE is trying to prevent Maytag from entering the market for high efficiency clothes dryers. Even though high efficiency dryers are more costly to produce, they are also more profitable as they command sufficiently higher prices from consumers. The following payoffs table shows the annual profits for GE and Maytag for the advertising spending and entry decisions that they are facing.

Based on this information, can GE successfully prevent Maytag from entering this market by increasing its advertising levels? What is the equilibrium outcome in this game? Suppose that an analyst at GE is convinced that just a little bit more advertising by GE, say another $2m, would be sufficient to deter enough customers from buying Maytag, thus, yield less than $0 profits for Maytag in the event it enters. Suppose that spending an extra $2m on advertising by GE will reduce its expected profits by $1.5m, regardless of whether Maytag enters or stays out. Would this additional spending on advertising achieve the effect of deterring Maytag from entering? Should GE pursue this option?

Paper For Above instruction

Game theory provides a strategic framework for analyzing competitive interactions between firms such as General Electric (GE) and Maytag in the high-efficiency clothes dryer market. The decision for GE to increase advertising to deter Maytag involves assessing whether additional investment can alter the payoff structure sufficiently to prevent market entry. The payoffs table illustrates the profits for each firm based on their strategic choices: GE's advertising expenditure and the decision to stay out or enter the market, alongside Maytag's advertising and entry decisions.

Initial analysis of the payoffs indicates that GE can potentially deter Maytag from entering by increasing its advertising expenditure. When GE chooses to stay out, Maytag’s profits are relatively high ($35 million) for minimal advertising ($0.7 million). If GE opts to enter with increased advertising, the profits for GE are modest ($1 million), but Maytag’s profits decrease to $20 million, emphasizing the impact of advertising on market power. The core question is whether the cost of increased advertising aligns with the strategic benefit of deterring Maytag from entering the market, thereby securing a more favorable future profit stream.

To explore this, the Nash equilibrium calculations involve analyzing the best responses of each firm given the other's strategies. If GE increases advertising from $12 million to $14 million, the cost adds $2 million to its profits, but the critical consideration is whether this shift moves the strategic landscape enough to make entry less attractive for Maytag. If Maytag anticipates lower profits due to GE’s increased advertising, they might choose to stay out. However, if Maytag’s payoffs based on advertising suggest that they will still enter, then the additional expenditure fails as a deterrent.

The scenario provided by the analyst introduces a marginal increase in advertising ($2 million), which is projected to reduce Maytag’s profitability below zero upon entry, creating a credible threat. The outcome hinges on the marginal cost of advertising relative to its effectiveness. If the additional $2 million expenditure decreases GE’s profits by only $1.5 million across all outcomes, then the net effect is a slight decrease in overall profits for GE but could still be justified if it effectively prevents a more significant loss due to market entry by Maytag.

Decision-making must balance immediate profitability against strategic positioning. If the marginal advertising increase successfully deters Maytag and preserves GE’s market dominance or prevents entry, the long-term benefits could outweigh the short-term profit reduction. Conversely, if the marginal increase does not reliably deter Maytag, then the extra advertising expenditure might be an inefficient use of resources. The overall strategic context, including market dynamics and potential retaliation from competitors, further influences this decision.

Thus, whether GE should pursue the additional advertising depends on a comprehensive analysis of the payoffs and strategic responses. Given that the marginal advertising costs are relatively low compared to the potential losses from market entry, and if the threat is credible and sustainable, then investing an additional $2 million could be a rational strategy. Otherwise, GE might consider alternative strategies such as product differentiation, cost leadership, or other forms of non-price competition to secure its market position.

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