Pay off matrix

Essay by lustercherry November 2008

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(a) Show the profits with and without loyalty cards in a pay off matrix.

Answer (a):(Without loyalty card) (With loyalty card)TidlTidl£100 m£100 m£120 m£60 m£60 m£120 m£ 80 m£80 mGhettoFigure 1(With loyalty card ) (Without loyalty card )(b) Calculate the combined profits of Ghetto and Tidl for each of the possible situations.

Answer (b):Calculating the profits of Ghetto and Tidl each possible situation.

•Ghetto without loyalty card & Tidl without loyalty cardCombined profit is £100m+£100m=£200m•Ghetto with loyalty card & Tidl without loyalty card Combined profit is £120m+£60m=£180m•Ghetto without loyalty card & Tidl with loyalty card Combined profit is £60m+£120m=£180m•Ghetto & Tidl with loyalty card Combined profit is £80m+£80m=£160mRobert M Grant (2008)(c) Explain, using the concept of a ‘dominant strategy’, which outcome is most likely.

Answer (c):A strategy is dominant when without considering what other player does, the strategy earns a larger pay off than any other player. A strategy is said to be dominant if itis better than any other strategy & yields the best pay off.

The three cases in the following figure 2 will show us the dominant strategy functional in the pay off matrix.

The best dominant strategy in this pay off will be both introducing the loyalty card scheme£120m£60m£60m£120m *£80m*£80mPay off matrix Figure 21)In the first case Ghetto benefits only £60 and Tidl benefits £120. Here we observe Tidl dominates Ghetto.

2)The case two Ghetto benefited £120 and Tidl benefited £60. Ghetto dominated the Tidl.

3)In the third case Ghetto and Tidl gained the same annual profit £80. So the most likely outcome & best dominant strategy is £80.

(d) Why are supermarkets faced with a dilemma when introducing loyalty cards? Who benefits from this dilemma?Answer (d): Each and every competitor in the world of super markets strives to get their upper hand and get them selves renowned so that they are proved better than that off others .In such cases they release loyalty cards seeing that the competitor also launches same set of loyalty cards with a different name, shape and different schemes which inturn turns supermarkets to get into dilemma. Baron David P (2006)In a nutshell it is a total loss for the firm as they spend billions of pounds which makes customers profitableCustomers are benefited from this dilemma(e) If, after a period when both competitors have been operating loyalty card schemes, Ghetto suggests that they discontinue their schemes simultaneously, would it be doing anything illegal?Answer (e):Yes it is illegal, According to UK competition law i.e. 1998 competition act itIs illegal if they discontinue their schemes suddenly with out a notice because it causes the inconvenience to the customers. Ghetto suggests that they suspend their schemes at once.

BIBILOGRAPHY:Baron David P (2006) Business and its environmentRobert M Grant (2008) Contemporary strategy analysis,6th Ed, Blackwell