Evaluating a Strategic Business Model

Evaluating Frameworks for Strategic Economic Analysis

Two competing airlines are simultaneously deciding whether to offer a holiday discount on a specific route they both service. Why is a standard market model, which only looks at the total supply of seats and total passenger demand for that route, insufficient for predicting whether the airlines will actually offer the discount?

In an economic situation where a small number of firms make decisions that directly affect each other's profits, a model based solely on aggregate market supply and demand is sufficient to predict each firm's optimal pricing strategy.

Rationale for Strategic Modeling

For each economic scenario, match it with the description of the modeling framework best suited for its analysis.

Predicting Competitive Pricing Outcomes

Imagine two gas stations are located directly across the street from each other. Both are independently deciding whether to lower their fuel prices to attract more customers. An economist wants to predict the final prices. Why would an economic model that only considers the total daily demand for gas in the town and the operating costs of the stations likely fail to make an accurate prediction?

Critiquing Business Strategy Outcomes

Analyzing Stable Outcomes in Strategic Situations