Game theory — Battle of two Soda Giants.

In 2017, there was a price dilemma for soda by the two biggest bottling companies in Nigeria. Coca-Cola and Pepsi both sold 50Cl for one hundred and twenty Naira (N120). After some months into 2017, Coca-Cola stopped producing 50Cl but produced 60Cl and 35Cl instead. Coca-cola sold these for N150 and N100 respectively while Pepsi continued to produce and sell 50Cl for N120. Few weeks after Coca-cola changed their products and prices, Pepsi switched to sell 50Cl for N100. Pepsi followed this up with lots of campaigns hammering on the new price. Then it dawned on me, there was a prisoner dilemma! This is Tweedledum and Tweedledee competition!! Game theory!!!

In game theory, there are 3 forms of competition. These forms of competition depend on the firms’ compatibility and competitive strategies.
1.
Tweedledum and Tweedledee — This is a normal competition where there is going to be a winner and a loser.
2.
Battle of the Sexes — Everyone prefers their own method and hence no competition.
3.
Pesky little brother — One prefers to a joint standard, basically little or no competition while the other wants to compete.

Prisoner’s dilemma in game theory signifies an area where the possible best outcome for the players is a minimum loss which can only be achieved when they cooperate.

An example of the Prisoner’s dilemma for two companies.

So, what is Game theory?

Wikipedia defines Game theory as the study of mathematical models of strategic interaction between rational decision-makers. These rational decision-makers are referred to as ‘players’ and under set(s) of rules, will deliver a certain outcome(s). In economics and business, these outcomes are the best possible profit. The outcome is best when the player knows what others are doing. John Forbes Nash Jr. proposed a solution for games involving two or more non-cooperative players in which each player is assumed to know the equilibrium strategies of the other players and no player has anything to gain by changing only their own strategy. This solution is called the Nash Equilibrium. Nash equilibrium displays possible outcomes based on the player’s decision and these are normally represented in a matrix format.

An example of the Nash Equilibrium for two players

Apparently, the increase of Dollar rate with respect to Naira could have probably left both Coca-Cola and Pepsi in Nigeria in a prisoner’s dilemma. The dollar rate rose by about 62% between June of 2016 and June of 2017 that is from $1 = N198 to $1 = N321. Both players needed to get the best possible outcome (profit) for their business sustainability and growth. Coca-cola made the first move to creating new products to sway customers to their products, possibly counting on low price switching cost and fear of missing out (FOMO) by consumers.

Switching cost is the amount of barrier required for a consumer to switch brands. This barrier includes the cost of alternatives, loyalty, etc.

Then the surprising thing happened, Pepsi moved its price to N100, possibly countering using switching cost strategy and the 100 naira note.

Nigeria has currency notes for N5, N10, N20, N50, N100, N200, N500 and N1000. Setting a price at any of the notes makes it easier for buyers and retailers to carry out a less stressful transaction.

Pepsi even gave out free bottles at the Lagos toll gate and paid for tolls at a particular period of the day for some days. Since big corporates are familiar with effective use of timing, Pepsi made good moves over the next few months, to partner with very popular pop artistes, gave an extra 20% volume on their 50Cl, sponsored the National team for the 2018 world cup and planned with these artistes on their December fiesta shows.

December in Nigeria is when most people spend freely, even spend more than they usually do. This is very perculiar with those in Lagos state — let’s face it, there are less traffic on the road and lots of happiness in the air.

I can guarantee you that the cola-war is not over. There are constant matches and innovative strategies on how to gain more customers and possibly retain them. It has happened before like the find your name in the coca-cola bottle challenge and will continue to happen. Coca-cola in 2018 launched Mama, a 1-liter bottle selling for two hundred Naira (N200) and as of the time of writing, Coca-cola partnered with the EPL (English Premier Leauge) to displays images of favorite players from different EPL football teams on their bottles. I’m patiently waiting for Coca-cola’s adverts and marketing toward the upcoming (international) mother’s day.

Conclusion.

Game theory is constantly happening and unfolding new/improved/modified strategies. This can be a network provider changing its rate of call or data to get new customers or a hotel providing better service for the same swimming pool fee as its competitors. I was introduced to competitive strategy in 2016 and took an advanced course in 2017. Most of the illustration had been very good price wars and games between strong companies in Germany and Europe. I used companies in Nigeria and Africa to relate to the examples but I was exclusively shocked when Coca-Cola and Pepsi had their price war in 2017, and it was beautiful. I think competitive strategy and game theory is worth taking note of and we can apply these strategies (modified) to our businesses or activities.

You can check out the competitive strategy and Advanced competitive strategy courses on Coursera.

Ebere considers himself a disciple of perpetual learning and constantly seeks better ways to utilize learned knowledge. Ebere is a software developer.