How can firms leverage game theory to optimize pricing models?
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Firms can use game theory to optimize pricing models by:
- Anticipating Competitor Reactions – Predicting how rivals will adjust prices in response to changes.
- Analyzing Market Dynamics – Identifying whether the market resembles a competitive, oligopolistic, or monopolistic game.
- Using Mixed Strategies – Introducing price variation or discounts to prevent predictability.
- Applying Nash Equilibrium – Setting prices where no firm benefits from unilaterally changing its strategy.
- Encouraging Cooperation – In some cases, tacit collusion or price-matching strategies can stabilize markets.
This approach helps firms maximize profits while staying competitive.