South-Western College Publishing - Economics  
Sony and Konka Play TV Games
Subject Prisoner's Dilemma
Topic Oligopoly
Key Words Market, Competition, Price, Profit, Costs, Competition, Quality
News Story

Konka, a Chinese manufacturer of television sets, has 25 percent of the Chinese market. Due to slower growth in China and fierce competition, it is beginning to sell its products in the U.S. It believes that it can compete on the basis of selling high-definition televisions (HDTVs) at a low price. It has made inroads in other markets through its low price and by giving retailers a higher profit margin. Konka expects to introduce a 32-inch screen HDTV, priced at $3,000, later in 1999-competing brands sell for $7,000 or $8,000. Knoka's costs are only about $2,000, compared to $12,000 for competing manufacturers, because it makes the HDTVs in China. It plans to open a plant in Mexico where labor is also cheap.

However, it faces stiff competition from established producers such as Sony, which has a higher-quality product. Also, other producers are planning to reduce their prices. Hitachi is already selling an HDTV set for $2,999, and RCA and Panasonic are expected to follow.

(Updated May 1, 1999)

Questions
1. Draw a large two-by-two payoff matrix with the strategic choices being to maintain a common high price or to cut price. Assume that the two producers are Sony and Konka.
  a) Indicate in the top-left cell how high the payoff would likely be for each producer.
  b)If, as now, Konka pursued a low-price strategy, but Sony did not, mark how the payoffs for each would change.
  c)If Sony pursued a low-price strategy, but Konka did not, indicate how the payoffs for each would change.
  d)If both decided to reduce their prices, what would happen to the relative payoffs?
2. Given the payoffs, what strategy should Konka follow? Why?
3. What might Sony do in response? Is there a danger in this strategy for Konka? Or for Sony? Explain.
4. At this point what might Konka and Sony decide to do? Why?
Source Sharon R. King, "A High-Definition Gambit: Chinese Test U.S. Market With Cheaper HDTV Sets", The New York Times, April 1, 1999.

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