Wednesday, March 9, 2011
Class 14 Take Aways
Small is Beautiful
This class completed our segment on game theory in practice. It also marks the end of the first half of the course. In this unit, we learned how a "small is beautiful" strategy can allow an entrant to prosper even if it lacks any form of competitive advantage whatsoever. The key is the correct marketing mix---targeting only a subsegment of consumers and charging prices much lower than the incumbent. The strategy works because the incumbent lacks the flexibility to price discriminate between targeted and untargeted customers. It's another example of how outward thinking can create new uses for standard tools (like targeting).
Formally, the entrant looks forward and reasons back. It's targeting and pricing strategy determine the "game" played by the incumbent. In this game, the entrant wants the incumbent to accommodate (so it needs to both make fighting costly by setting a low price and accommodating relatively painless by not targeting too many customers. Here, the marketing mix is for the benefit of the rival, not as a means to capture value from consumers.
When does this strategy fail? It obviously fails if the incumbent can price discriminate. It also fails if the entrant cannot commit to stay small. Imagine a longer game where the entrant can increase its targeting in each period. In that game, the incumbent might well decide to crush the entrant early, even though this fight is more costly than accommodating in the short run, simply to head off the entrant growing larger in the future.
The small is beautiful strategy is closely tied to the puppy dog ploy we saw earlier. In both cases, the idea was to be as non-threatening as possible so as to avoid provoking an aggressive response.