Solutions to Upping the Ante: Gillette vs' Schick in the WetShaving Market 5 point sheet handed in N

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Solutions to Upping the Ante Gillette vs.
Schick in the Wet-Shaving Market5 point
sheet handed in Nov. 11, 2003MGT 492Mara
Lederman
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• Begin by calculating the payoffs to the two firms
  in each possible scenario.
• DRAMATIC INNOVATION

One launches a dramatic innovation, the other
does not From case (p-c) 0.88 q 400
million Therefore, ? 0.88(400) 352
million Discounting, ? 352/0.15 2,347
million Subtract 1 billion upfront cost, ?
1,347 million
Both launch a dramatic innovation From
case (p-c) 0.5 q 200 million
(each) Therefore, ? (p-c)q 0.5(200) 100
million Discounting, ? 100/0.15 667
million Subtract 1 billion upfront cost, ?
-333 million
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• MODERATE INNOVATION

One launches a moderate innovation, the other
does not From case (p-c) 0.75 q 340
million Therefore, ? 0.73(340) 255
million Discounting, ? 255/0.15 1,700
million Subtract 300 upfront cost, ? 1,400
million
Both launch a moderate innovation From
case (p-c) 0.43 q 170 million
(each) Therefore, ? 0.43(170) 73.1
million Discounting, ? 73.1/0.15 487
million Substract 300 million upfront cost, ?
187 million
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• Now use these numbers to set up the two-stage
  game (payoffs are in millions)

Schick
Gillette
MODERATE
GILLETTE
Schick
DRAMATIC
Gillette
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• Solve for the NE in each second-stage game

Schick
In the top game, launch is a dominant strategy
for both players. NE is (Launch, Launch).
Gillette
MODERATE
GILLETTE
Schick
DRAMATIC
Gillette
In the bottom game, launch is a dominant
strategy for Gillette but not Schick. Knowing
that Gillette will play launch, Schick will
play dont launch. NE is (Launch, Dont
launch)
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• Intuitively, why do these NEs emerge?
• In the moderate game, the duopoly profits when
  both launch are large enough to induce both
  players to launch a new razor system (i.e. both
  are still able to recoup the 300 million upfront
  cost)
• In the dramatic game, the two firms cannot both
  recoup their upfront cost of 1 billion if both
  launch dramatic products. This is because this
  upfront cost is too large relative to the duopoly
  profits. Because Gillette has the sunk the 1
  billion upfront cost in the first period, it is
  always better off launching than not launching
  (because at least by launching it recoups some of
  its upfront investment). Thus, launch is a
  dominant strategy for Gillette. Knowing that
  Gillette will surely launch, Schick is better off
  not launching and earning 0 than launching and
  earning -333 million
• Thus, in the first period, Gillette will choose
  the dramatic innovation
• By sinking the upfront expenditure for the
  dramatic innovation in the first period, Gillette
  is able to credibly commit to launching the
  dramatic innovation (even if Schick launches as
  well) in the second period and thereby deter
  Schicks entry

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• If Gillette is the only player, should it choose
  the dramatic innovation or the moderate one?
• Look back to the initial profit calculates
• If Gillette launches MODERATE and Schick does
  not
• GROSS PROFITS1700 million
• If Gillette launches DRAMATIC and Schick does
  not
• GROSS PROFITS2347 million
• The additional profits generated from the
  dramatic innovation are
• 2347-1700647 million
• However, the extra cost of the dramatic
  innovation is 700 million
• Therefore, if Gillette did NOT have to worry
  about Schick, it would prefer to launch the
  MODERATE product. Shows that in previous case,
  the reason Gillette prefers the DRAMATIC product
  is because of its entry deterring effects.