Memo 7

To: Pricing Manager, Central State Region

From: Vice President, Marketing

Re: Strategic Pricing Decision

Our only competitor in the Central State region currently provides bundled services at $79.95. We are currently charging

a 10 percent premium over its price, but there are rumors that it is contemplating a 10 percent price increase to bring its

price in line with ours. We don't know its cost structure, so we don't know whether its price increase is driven by rising

costs or a strategic move to gain margin.

Historically, when we both charge the same price, our market share is about 65 percent. When we charge a 10 percent

premium over its price, our market share declines to about 60 percent. It appears that in those instances when it

charges a 10 percent higher price than us, our market share is about 7O percent.

Please provide a recommendation regarding whether we should maintain our current price or reduce our price to

$79.95. Please factor into your recommendation that we pay programming fees that amount to $49.50 per subscriber, In

addition, maintenance, service, and billing costs are about $6.50 per subscriber. At present, there are 110,000

households in the relevant market.

Instructions: Use game theory to analyze whether Time Warner Cable should maintain its current price or reduce price to $79.95 Set up a payoff matrix that shows the payoff (profit) to Time Warner cable and its competitor based on the two pricing strategies ($79.95 and $87.94). Assume that the competitor has the same costs as Time Warner Cable. Use the concept of dominant strategy to help you make your recommendation. T