Modeling Pricing Problem on Clothing Industry Using Game Theory: Domestic Vs Import Products
Domestic Vs Import Products
Keywords:
Constant elasticity of Substitution (CES), Game theory, Import tariff, Leader-follower problem, Textile and clothing industry, Pricing strategyAbstract
Indonesian textile and clothing industries is one of nation strategic industrial sector which consists of two industries in which are connected in a single supply chain: textile industries and clothing industries. Government as a regulator may intervene to protect domestic product from its competition by applying tariff on the import product. This research attempts to model competition between domestic products and import products on a domestic market. Game theory is used as an approach to model the problem of pricing strategy faced by domestic industries. The problem is modeled as a leader-follower game which represents a price negotiation problem between the market and the clothing industry. The research contributes to literature in research of pricing games by using Constant Elasticity of Substitution (CES) function. Utility functions used in the model are revenue maximization and utility maximization for the clothing industry and consumer, respectively. Three tariff scenarios are simulated to observe tariff impacts on the game solution. The highest revenue achieved while applying the maximum import tariff on clothing products. Consumer’s utility is decreasing as tariff increases. Sensitivity analysis reveals game’s optimal strategy depends heavily on the preference and substitution parameters.
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