Thursday
April 24, 2014

Homework Help: Managerial Economics

Posted by Ed on Wednesday, August 1, 2007 at 10:07pm.

I'm not sure I see the light here....Can the economyst help me super size this?!?!?!
Thanks!

2) When McDonald’s Corporation reduced
its price of the Big Mac by 75% if
customers also purchased french
fries and a soft drink, the Wall
Street Journal reported that the
company was hoping the novel
promotion would revive its US sales
growth. It didn’t. Within two weeks
sales had fallen. Using your
knowledge of game theory, what do
you think disrupted McDonald’s
plans?
ANSWER:
McDonald’s needed to know their
industry inside and out before the
game theory can bevaluable. The
needed to understand entry curves.
Without that understanding the
answer you get from the game theory
may be wrong.


First off, I disagree with your opening statement; I think game theory can be a useful analytic tool for, even with imperfect knowledge. Further, many decisions are made using "game-theory" techniques, even if the decision maker is unaware of any formal game-theory type models. (just as a pool player doesnt need advanced geometry/trigonometry to be a good pool player, a business manager doesnt need to be formally educated in game theory to apply game theory techniques to his decision making.) We all make decisions with imperfect information -- thats just a fact of life. And if we waited until we had full or nearly full information, we would never decide anything.

Game theory, in economics, is largely about how other players are likely to respond to decisions or indecisions by a particular player. Often the expected response is an educated guess.

Now you need to get specific. I can, off the top of my head, see several game-theory type applications to your McD's marketing ploy. First, by lowering the price of Big Macs, McD's current customers would likely switch and buy more Big Macs and less of something else. What is the size of this shift? Second, lowering the price of Big Macs would draw in new customers. How much new sales are being generated. Third, McD's competitors may respond to this promotion with a promotion of their own. Fourth, did customers or competitors view McD's price change as a permanent change or just a temporary promotion?

So, take it from here....

FYI, I will be taking some time off starting this weekend. I probably wont visit the Jiskha site for at least a week, maybe more.

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