Tuesday, November 25, 2008

Game Theory - Part 2

This is a continuation of the last post on game theory

Just for argument sake, let's look at the taxi industry in Singapore. There are 6 taxi companies, ie 6 prisoners. The Big Brother is of course Comfort, with 60% market share, having 14,000 taxis out of the total population of 23,000 taxis. Then there is No.2 SMRT with 3,000 taxis or so.

Currently everyone is just following Big Brother moves and nobody is saboing one another. Which is very good for the industry, as profits can improve for everyone. However, passengers suffer lor. We have to accept price hikes no matter what.

Actually, if you think about it, 1 taxi co. can play punk and not follow suit. E.g. SMART taxi sabo the rest by reducing flagdown rate $2, which is significantly lower than its rivals' $3. By doing this it can actually gain market share. Well that's theory lah, in reality, it will not work bcos

1) Passengers currently cannot choose taxis in a taxi queue, so some kind of mentality change needs to take place, maybe like local celebrities leading the movement of choosing taxis in a queue or something

2) Taxi drivers of SMART may not be smart enough (no pun intended :) to realize this can actually boost their revenue and hence protest fervently to the lower flagdown rate

3) The taxi capacity (or supply) in Singapore is actually very tight, demand for taxis at peak hours dramatically exceeds the taxi population capacity, hence there is no need to resort to cutting prices to gain market share to boost revenue at this stage.

Well all this would change as our society matures. Some day in the distant future, taxi usage may decline and taxi population may actually exceed demand and there will be such a need to resort to price wars.

But even so, as one can imagine, after SMART reduces flagdown to $2, Comfort can simply reduce to $1.90 and crush all competition. So nobody will dare to do such things today. So in this set of prisoners, the outcome is usually quite favourable bcos there is a dominant leader that can dictate others' decisions.

However, back to our distant future scenario, taxi usage is in decline and most taxi co.s are struggling, in desperation, SMART, Prime, SMRT and Silvercab merge to form one company which will now have 50% market share. This new entity then reduces flagdown rate to fight Comfort. We may see the worst case scenario in the prisoner dilemma, ie both parties suffer as they reduce prices but yet cannot gain market share. However this will actually be very good for consumers.

Well, that's a sort of real-life game theory analysis of industries. Hope it can give some insights when you think about the companies that you want to invest in.
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