Collective Action Problem

Problem Statement: –Rivals Coca- Cola and Pepsi-cola have to make up one’s mind whether or non to offer price reduction pricing.

Matrix: –

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Pepsi – Cola
Coca- Cola Pricing Scheme Discount monetary value Regular monetary value
Discount monetary value $ 4b. $ 2b $ 8b. $ 1b
Regular monetary value $ 2b. $ 5b $ 6b. $ 4b

* B means billion

Description:– Both companies can take one result by offering a price reduction monetary value or a regular monetary value. The final payment for each house depends upon the pricing schemes of both houses. For coca- Cola the worst instance scenario is $ 2 billion final payment when it offers regular monetary values while Pepsi-Cola charges price reduction monetary values. Similarly. for Pepsi- Cola the worst instance scenario is $ 1 billion.

Solution: –A quandary is involved because each party would wish to hold maximal benefits by offering the price reduction and trusting that the other doesn’t. The lone secure means both companies have of avoiding meagre net incomes is to offer price reduction monetary values. The ideal scenario would hold been when both were offering regular monetary value as they would hold earned $ 6 billion ( Coca- Cola ) and $ 4 billion ( Pepsi-Cola ). But. it’s hard to swear each other and therefore. they both go for the conservative scheme and settle down for net incomes of $ 4 billion and $ 2 billion for Coca-cola and Pepsi-Cola severally.

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