Applying Game Theory In Discount Pricing Strategy For A Family Of Items

Abstract

Quantity discount strategy is an efficient method for business development in large companies all over the wolrd, especially those in fast moving consumer goods. The empirical policy is once applied properly, not only the sales increase, but the profit level also becomes higher. This paper will focus on pricing strategies of a company whose products are often classified into families based on their features. A discount policy has been investigated under Stackelberg game theory model, together with an inverse process. The model also takes into account the price elasticity of demand so as to establish a quantity discount policy with the best reaction from the buyer. Moreover, an extended part in comparison with the key reference is the utility of specific scenarios of the company. Furthermore, the analysis will include experiments on how the payoffs for both parties change in cases the costs vary. In addition, the study will examine how should the company response with customer’s sensitivity of price. On the other hand, the model will be validated by Mathematica program, which is a effective application for calculating complicated algorithms. This program is indeed convenient for the nonlinear model of this thesis. The final results will illustrate the optimal percentage of discount price, time breakpoints and payoffs for both firms. Put another way, if buyer follow the optimal replenishment schedule, she will receive discount and her reward is significantly higher, otherwise, she has to purchase products at original price.