The Park’n shop is one of the largest supermarkets in Hong Kong, and is in the competition of oligopoly. The word ‘oligopoly’ refers to a market, which dominated by a few largest producers of a homogeneous or differentiated product. Because of the market is dominated by only a few number of producers, oligopolists have considerable control over their prices, but each must consider the possible reaction of rivals to its own pricing, output, and advertising decisions.
It is well known that the only ‘foe’ of Park’n shop is Wellcome, a well-known supermarket in Hong Kong. Both of them sell similar, nearly homogeneous good, to customers. Therefore, the pricing of goods of these two supermarkets will be mutual interdependence. Oligopolists, although, powerful enough to affect the market price, but they can never ignore the react of its competitors take. In other words, the profit of a firm, in oligopoly competition, is not entirely depends on its own price and sales strategies but also on those of its rivals.
Four years before, Park’n shop emphasize the lowest price guarantee on their goods, which have a yellow price label. The good, which guarantee sells on the lowest price throughout Hong Kong, are, initially, about 1400. Nowadays, the goods, which under the list of lowest price guarantee, are more than 3000.
Wellcome then aware the newly introduced pricing strategy of Park’n shop, it does what Park’n shop does. Wellcome introduced in same lowest price guarantee concept on their sale. Any good in Wellcome with a ‘Tick Label’ will be guaranteed to sell at the lowest price in Hong Kong. Needless further explanation, the ‘Tick Label’ is the reaction to the new pricing strategy of Park’n shop.
Supposing Park’n shop cut their price, but Wellcome does not. Nearly all the customers will not have an incentive to purchase anything from Wellcome. As in the eye of the customers, Park’n shop and Wellcome is just the same, a supermarket. That means these two shops are close substitute in term of the good they sell. The decrease in price of Park’n shop will lead to a decrease in quantity demanded of Wellcome. That explains why Wellcome have to follow the pricing strategy of Park’n shop simultaneously.
On the other point of view, this pricing method can be explained by the Game Theory. The theory is a study of how people behave in strategic situations. We now assume two-firm, say Park’n shop and Wellcome, sell good to customers. Each of them has a choice of two pricing strategies, price high or price law. The profit they earn will depend on the strategy it chooses and the strategy its rival chooses.
There are four possible combinations of strategies for the two supermarkets, and a lettered cell in the figure represents each combination. For example, cell C represents a low-price strategy for Wellcome along with a high-price strategy for Park’n shop. The figure is called a payoff matrix, because each cell shows the payoff profit to each firm that would result from each combination of strategies.
If Park’n shop practise low price strategy, whilst Wellcome practise high price strategy The market share of Park’n shop will increase, and learn more than before. Wellcome aware its situation, it also practise low price strategy. The market share is evenly share of them again. Nonetheless, the profit they make is not as many as before the low price strategy. However, both of them have not incentive to rise their price to capture the higher price from the sell of good. Because both of them known that they will lose a majority part of market by doing so. This explains why Park’n shop and Wellcome set their price for their goods as low as they can.
Pricing strategy is an ever-lasting game, not a single can tell that which strategy is the best for anytime. However, a good oligopolist must be adopting the market affecting by its rivals and take reaction as soon as it is profitable to do so. Any business which fail to satisfy this rule of game of oligopoly, will be punish by the market at once.