Game Theory Utilisation Analysis

Business Economics Module

Game Theory Utilization Analysis

Introduction:

Oligopoly within a given market directs the behaviour of its firms to be interdependent. Each firm needs to take into its consideration the action of the other firms and the effect of this action on the market behaviour and the given outcomes for all firms within the given market. This sense makes these companies in continuous prediction and assumption status for the givens and the deliverables of the market (J. Sloman, Kevin Hinde, and Dean Garatt ed. 2010).

The relationship between oligopolistic firms can go into some collusion and thus they can maximise the industry profit or into a competition where each firm is looking for an extra share of the market profit on expenses of the other firms.

The Game Theory analysis tries to explain and analyse the different reactions within a competitive non-collusive oligopolistic market. Economists test for best strategies to adopt for a given firm and the possible responses from the competitive firms (J. Sloman, Kevin Hinde, and Dean Garatt ed. 2010).

Some limitations do exist for the use of the game theory. LaValle 2006 stated that; “One of the most basic limitations of game theory is that each player must know the cost functions of the other players.” Costing, market motivations vary and create areas of uncertainty towards the decisions taken. (S. M. LaValle, ed. 2006).

In this document will try to utilise the contribution of the game theory in analysing the performance of three different markets within Egypt.

Pharmaceutical companies and the hospitals’ market:

As-Salam International Hospital (ASSIH), one of the leading hospitals in the private sector in Cairo, aiming at maximising its profit in 2015 adopted a strategy for purchasing medications from the market while referring to the availability of multiple brands for a given generic medication. This strategy planned for best prices and profit margins provided by different companies for a given generic.

The pharmaceutical companies were requested to raise their bidding while the clear choice would be, after exclusion of brands that are technically not accepted by the medical team for a given reason, based on maximum possible profit margin.

While bidding, the value of the game theory between bidders and the hospital here lays in the fact that hospital benefit is to obtain the lowest price from the three to four companies that pass the technical assessment. On the other hand, the companies are trying to have the highest rate possible of selling to maximise their profits as well (Jiang W, 2004).

Details of the tender declared for the bidding companies with the particular yearly needs and distribution among the year; bidders were allowed to submit their offers to be studied and choose the best lucrative offer.

According to the assumptions based on the game theory where the hospital gave full detailed information, and the companies were allowed to bid freely initially, the expected outcome was that the hospital is receiving the lowest price with a winning bidder who gave an amount which is less than others but still profitable.

The hospital took the second step by declaring the details of each offer and shifting the bidding into open transparent. In this stage, each company had to return and study the possible moves by the other given companies and started squeezing their offers till we reached the lowest price between all companies which might not be the least satisfactory to the bidder because the profit margin squeezed to a minimum. Figure 1 explains the strategy adopted.

[pic 1]

Putting this into logical assumptions of the game theory, and taking into consideration that the bidders have to accept the responsible tender man decisions and change of initiative of the second step of bidding. The tender built that the least price offer with maximum profit margin obtained from the companies.

The drawback of using the game theory model here was that it did not put into consideration the original brand which is of importance in the market itself and has a weight. The main brand was stuck with importing prices and cost of the material from abroad while the local companies had the luxury of buying their resources at a much lower price and thus they were able to compete together with the lowest possible price while the original brand was knocked out from the tender due to this point.