Chapter 3: The marketing environment and a game theory perspective on competition

Chapter 3: The marketing environment and a game theory perspective on competition
Aims of the chapter
The aims of this chapter are: • to identify the different elements of the marketing environment • to distinguish between those elements • to describe some of the elements • to introduce you to some aspects of game theory.

Learning objectives
By the end of this chapter and the relevant reading, you should be able to: • distinguish between the micro and macroenvironment of a firm • describe how the different elements of the micro and macroenvironment affect firms’ marketing activities • distinguish between zero-sum and non-zero-sum games and the implications for competitive behaviour • explain the different methods firms can use to elicit co-operation.

Essential reading
Kotler, P and G. Armstrong Principles of marketing. Chapter 3. . Note: You need to be aware of the impact of a changing population structure but don’t need the level of depth or detail given by Kotler; for example, the material dealing with baby boomers, millenials and the changing American family is not needed; also not required is the material on geographic shifts in population. You should understand the implications of increasing diversity for marketers generally, but do not need to know the details of the American situation. You need to know what secondary cultural values are generally, but you do not need to know the specifics of the different types that Kotler gives.

Further reading
Axelrod, R. The evolution of co-operation. (London: Penguin Books, 1990). Deber, R.B., N. Kraetschemer, S. Urowitz and N. Sharpe ‘Patient, consumer, client or customer: what do people want to be called?’ Health Expectations 8 (2005), pp.345–51. McDonald, C. Challenging social work: the context of practice. (Basingstoke: Palgrave Macmillan, 2006) p.115. McLaughlin, H. ‘What’s in a name: ‘Client’, ‘Patient’, ‘Customer’, ‘Consumer’, ‘Expert by experience’, ‘Service user’ – what next?’ British Journal of Social Work 1–17 (2008). Redding, P ‘The evolving interpretations of customers in higher education: . empowering the elusive’, International Journal of Consumer Studies 29(5) 2005, pp.409–17.


How marketers cope with such changes is also covered. These forces include demographics. Finally. customers. The ‘marketing channel’ used by the firm (for example. 4. The marketer’s ‘internal environment’ (i. changes in consumption due to economic development and political changes. nature. 5. This site has a diagram illustrating the prisoners’ dilemma. In the first part we will look at the marketing environment. links with the other topics in this subject. social and technological environments. 2. reseller. government or international markets). interested publics can also include local interest 22 1 Those of you who studied Principles of sociology should recall the coverage of ‘Elements of organisations’.tutor2u. 3. economics. its suppliers). The macroenvironment is made up of wider forces which affect demand for a company’s goods. technology. You should note that while this chapter and the accompanying material in Kotler and Armstrong (2010) draw attention to specific aspects of the political. its own management structure). For example. As well as obvious groups such as shareholders. The markets in which the firm may be selling (these may be consumer. these are an important element of the internal environment for an organisation. Such factors include demographic changes. how specific changes in the economic environment have had an influence on marketers. changes in fashions. Those groups of people who have an interest in the marketer’s ability to achieve their objectives. Introduction This chapter has two parts. . the mission of an organisation explains what the organisation is about and what different stakeholders can expect from it. since these can have a major impact on how marketers change and evolve their own marketing strategies. politics and culture. The microenvironment1 The microenvironment consists of five major factors: 1.htm (last accessed 29 April 2009). In the second part we will look in more detail at how game theory can be used to understand the interactions between competitors. The microenvironment comprises the company’s suppliers. for example.e. Another important theme that runs throughout this course is the fact that marketers have to be aware of changes that take place in the marketing environment. Types of environment Companies interact with two types of environment: the ‘microenvironment’ and the ‘macroenvironment’. you should remember that study of the marketing environment is important insofar as the environment can have an important impact on the activities of marketers. You should be aware that examination questions on any of the other topics may require you to have an awareness of the issues addressed in this topic. marketing intermediaries and competitors. economic. both the micro and macroenvironments. This chapter focuses on the environmental factors which affect the marketing activities of organisations. The firm’s competitors (also contained in the ‘internal environment’). Clearly there is a similarity in concepts and their study in this chapter will repay when you reach the end of the subject. though often unstated. That topic considered the role of ‘missions and goals’. these are all dynamic areas and for examination purposes you need to have your own examples that illustrate. For this reason this topic has producer.141 Principles of marketing Useful websites www.

there was a concern that the notion of a ‘client’ represented an objectification of the social work relationship whereby it was assumed power laid with the professional to identify what the passive client needed’. there is another distinction that is made between consumers and customers (which is unrelated to the business buyer and consumer distinction). The move has become more widespread with organisations still under government ownership taking on business concepts and ideas as a means of improving efficiency and responsiveness to the needs of the people they deal with. the term client came to be challenged both from within and outside the (social work profession). In these businesses it is the marketer who is often in a position to advise their customer as to what their needs and wants are. you should be aware that the very notion of calling people ‘customers’ has attracted debate in recent years. however. in the fields of health. The power balance between the marketer and the people they are undertaking exchanges with is quite different according to whether the latter are customers or clients. Consumers are understood to be people who actually use a product or service and customers are the people who pay for these. and then charge fees for delivering services that meet these needs. consumers or clients? In standard marketing texts there is an initial distinction made between business buyers and consumers. In contrast the term ‘client’ is generally associated with the provision of professional services (such as accountancy and legal services). McLaughlin (2008) says. In this sense. In the case of babies marketers will need to make appeals to the customer (parent). Within discussions relating to consumer markets. The latter are people who buy for their own use. One of the developments that has taken place is referring to such people as ‘customers’.Chapter 3: The marketing environment and a game theory perspective on competition groups who may have concerns about the marketer’s impact on the environment or on local employment. ‘In the UK. In a paper dealing with social work. Customers. The characteristics of the firm’s internal environment affect its ability to serve its customers. there has been a debate about the role of the service provider and the people that they are trying to serve. for example. Since the 1980s when there was a move in developed countries to privatise industries and organisations that were previously under government ownership. there has been an ideological move towards introducing business concepts into such organisations. Customers are considered to be people who have a relatively high ability to define what they need and want and the marketer has to respond to these needs and wants. From within. Indeed the very notion of referring to people as ‘customers’ or ‘clients’ has been questioned. This distinction is important because the customer will be making decisions about what to buy. However. with the idea being that this will encourage staff to be more focused on addressing their needs. education and social work. but in the case of young children marketers have found that it can make sense to have advertising appeal to the consumer (the child) who can then ‘pester’ the parent to make the ‘right’ decision! In organisational buying there is a distinction between ‘customers’ and ‘clients’. but the baby is the consumer. In this context the term ‘client’ was considered to be a negative – because it would lead to clients of 23 . Although Kotler and Armstrong take the term ‘customer’ for granted. The text below highlights the nature of the debate in a number of different professions. based on what they think the consumer will want. the parent is the customer for baby food because they make the purchasing decision and the payment.

holidays and home improvements.g. since changes in education have an impact on the wealth of a nation and the tastes of its people. fracture. this will lead to rising demand for products and services consumed by older people and a similar fall in demand for products consumed by younger people. The macroenvironment Demographics The demographic environment itself is affected by changes in the mix of age groups in the population. Furthermore. The term ‘customer’ is not always a neutral one and it has connotations that not all people in all organisations will appreciate. The point you should take away from this discussion is that there will invariably be a variety of ways in which marketers can refer to people with whom they are exchanging goods and services. Redding (2005) says: ‘Customer-related truisms commonly touted in business include: ‘the customer knows best’. constructing both the relationship and attendant identities of people participating in the relationships. In a number of countries. 24 . Yet our results suggest that the individuals we surveyed still place high value on a relationship with their provider that is based on a model other than that between buyer and seller. metaphors that indicate how we conceive them.’ There is a perception that the term ‘customer’ is misapplied in a context where there is a significant information asymmetry between provider and receiver. Yet academics … are all quick to point out that this is not. It seems to be captured by the label “patient”. as ethnic groups emigrate to other countries. there has been a debate as to whether students can meaningfully be referred to as ‘customers’. their own tastes can affect those of consumers in the host nation (e. a large proportion of women go out to work.’ The essence of this debate is captured in the following quotation: ‘The words we use to describe those who use our services are. client). Deber et al (2005) conclude: ‘The results show that the respondents from the four clinical populations (breast. the ethnic mix of consumers is changing due to immigration and other factors. If the population becomes older. This has resulted in an increase in the sales of convenience foods. rather than achieve strong support. prostate. This will be reflected in changing demands for various goods not only from the specific ethnic group but from other consumers whose tastes have been affected by them. inducing very practical and material outcomes. such as the disabled. at one level. HIV) tended to reject most of the labels suggested to replace ‘patient’ (customer. There are also more couples whose children have grown up and left home. This may be a sensitive issue in a profession where service providers deal with vulnerable sections of society. It must also be recognised that the term patient tends to be moderately preferred. Such couples have more disposable income to spend on luxuries. survivor. partner. In the education context. In Western countries there has been a growth in households made up of single people. The development of ethnic markets can also be relevant.141 Principles of marketing social services feeling disempowered. consumer. The lifestyles of a population also have an impact on the macroenvironment facing marketers. Finally in the field of health. At another level such labels operate discursively. Asian foods are now sold within UK supermarkets).’ McDonald (2006:115). The demographic environment is also affected by the level of education in a country. nor should it be the case with students.

The economic problems faced by some countries have meant that some international marketers cannot be paid in hard currency. Consumers around the world differ in the extent to which they save money and the use they make of credit facilities. There is increasing pressure from public opinion as to the sources of raw materials and their effect on the natural environment. Furthermore. which will affect industry’s borrowing costs. Technology2 Technological developments offer marketers both opportunities and threats. To make sales. despite the level of poverty. in some countries there is a trend towards small cars and products which save energy. changes in technology also mean that there may be more than one technical solution to a customer’s needs. it is possible for manufacturers and consumers to cause less damage to the environment. A high propensity to save will result in a lower propensity to consume. has become economic. While firms can offer customers a wider array of advanced products. The latter argue that the information explosion of recent years has not led to increasing conformity. There is also pressure on them not to use chemicals and bleaches in their processing of paper. While Sony’s technology was considered superior. Nature This is important to marketers insofar as it is the source of many raw materials and fluctuation in supply can affect the prices paid for purchases. there can be problems for marketers who had promoted an alternative standard. One of the components of the economic environment is the distribution of income. the second type of country may be more attractive to marketers of inexpensive goods for the mass market. such as aluminium. but it has led to an increase in diversity and choice. therefore. For example. 25 . Paper manufacturers have had to pay attention to sourcing pulp from renewable forests. where trees are replanted to make up for those which have been felled. In contrast. The former group of countries may be markets for luxury goods. 2 Those of you who have studied Principles of sociology will recall the argument between modernists and postmodernists. Due to developments in technology. Economies around the world not only vary in their absolute or total level of wealth but also how their wealth is spread within the population. Where a market converges towards one technological standard. most other manufacturers adopted the VHS format and ultimately Sony stopped selling Betamax video recorders and switched to making those using the VHS format. the increasing cost of some raw materials has meant that recycling of some materials. these patterns will also have a secondary effect on the overall macroeconomy of a nation. For example. Various European countries encourage the use of catalytic converters in cars to reduce the levels of poisonous gases which are emitted into the atmosphere. This highlights the issue that there can be considerable debate about the impact of changes in technology on society. The increased cost of energy is also having an effect on the types of products which appeal to consumers. they have had to barter their products. An example of such a situation was illustrated by the fight between two alternative video formats: VHS (promoted by JVC) and Betamax (promoted by Sony). However.Chapter 3: The marketing environment and a game theory perspective on competition Economics The economic environment is important to marketers because it affects the amount of money people have to spend on products and services. poor countries may be classified either as those which have a highly unequal spread of wealth or those where it is more evenly shared. An example of this is the barter of Pepsi-Cola for Russian vodka by the Pepsi company and the old Soviet government. as the modernists have argued. Today there is a similar struggle between suppliers of different types of hi-fi equipment. A country where people have a high propensity to save is likely to be characterised by low interest rates.

Such groups may arise out of a common race. Sub-cultures are important to marketers insofar as they may have different consumption habits from the rest of the population. Specifically. They contain sub-cultures. Following that argument. You should also recall the coverage given to ‘religion’ and how this can influence behaviour. One of the definitions put forward in that subject highlighted that as a result of globalisation the constraints of geography on culture recede and people act accordingly. Technological developments affect how people work and do business. the falling cost of technology has meant that many more small firms can function in areas such as publishing and film production. 4 . some are argued to be more powerful than some nation states. Culture4 People’s opinions and tastes are shaped by the society in which they live. For example. Apple Computer gained an advantage over IBM and IBM-compatibles through the use of its Graphic User Interface (GUI). the introduction by Microsoft of Windows meant that IBM users could also have a pictorial display on their screens. That is an important issue which is significant for examination purposes and you should pay attention to it. based on trust between customers and suppliers. suppliers and even competitors. Political changes in Eastern Europe have also meant that these markets are now open to marketers from around the world. Politics3 Marketers are influenced by the regulatory environment. as people’s opinions are influenced by the media. Those of you who have studied Principles of sociology will recall the discussion about globalisation. This is expected to help in the development of products and the management of technological risks.141 Principles of marketing Increased technological development accelerates the speed of obsolescence. The political environment around the world has recently favoured the privatisation of public companies. 26 3 Those of you who have studied Principles of sociology will recall the points made about the size of transnational corporations and the impact that they can have on people. Furthermore. which meant that the users can manipulate pictures on the computer screen rather than use complex commands. there has been an increasing emphasis on open. This made it much easier to use than IBM personal computers. Indeed. it will have an impact on the cultural environment. It should be noted that societies are not made up of homogeneous populations. this reduced Apple’s advantage. social activity or hobby. Chapter 5 of Kotler and armstrong (2010) ends with a discussion of how marketers can respond to the marketing environment. More susceptible to change are secondary values. To regain the advantage Apple introduced a new computer chip (PowerPC) which was supposed to be faster than the Pentium chip used by IBM. In a number of countries this has resulted in the establishment of small firms in these areas. Such companies have also been able to compete more freely in the private sector. religion. long-term relationships. Core values are likely to be strongly held and it may be difficult for marketers to promote a message which runs counter to them. This has implications for their obligations to customers and the wider public. Indeed. the subject mentioned that substantive definitions of religion are based on religious beliefs – in terms of a marketing context such beliefs can drive consumption behaviour. Customers are increasingly able to seek redress for faulty products and those who live near manufacturing plants are able to claim compensation for pollution. which are beliefs and values shared by smaller groups of people. For example. if globalisation is taking place. the falling cost of telecommunications coupled with their increased sophistication has meant that it is possible for individuals to work away from the office. which used to be the domain of large organisations. role models and changing tastes. Marketers have to consider how their product may need to be developed over time if it is to remain competitive. The risks from technological changes have meant that firms are increasingly entering into ‘strategic alliances’ with customers. The following are some aspects of culture which influence people’s consumption: the ‘core’ culture is that set of values which is handed down from generation to generation and which is reinforced by social institutions such as schools and places of worship. In the future this could lead to lower usage of transportation systems. However.

In our marketing context. economic. they can give managers useful insights into the strategies that may work in the real world and an understanding of why some courses of action may be more effective than others.asp?n=62404-indian-packaged-foods-ethnic/ (last accessed 29 April 2009). it is based on an extract from 5 Introduction to game theory Game theory can be useful in helping marketers understand the external environment. Food formulators could delve deeper into Chinese offerings. The examples you use and the sources of information can be either local or international. with the report showing that Chinese food is the leading pre-packaged ethnic cuisine. An example for using the above figure is as follows. or it may consist of many rounds. particularly the way in which firms can deal with competitors. Where possible collect relevant statistics and collect details of the source of the information.1 shows the different elements of the macro and micro environments and also shows that the marketing organisation (represented by the marketing mix) is directly influenced by the microenvironment and that both are influenced by the macroenvironment. even where Chinese immigration is relatively low. 27 . and the possible gain will be in terms of profits or sales. Using Figure 3.foodanddrinkeurope. whose forecasts of sales could take into account the news of a healthy and growing market. John Band. social and technological changes taking place which will affect the demand for the products/services produced by that industry. A game may consist of a single set of decisions. popular across all of Europe. “This reflects Chinese food’s relative ease of consumption: it is not heavily spiced and it often features familiar ingredients.1. or a round. Demographics Technology customers Economics External Environment suppliers competitors management strategies & objectives Internal Environment public Culture other departments Politics marketing intermediaries Nature Figure 3. and the participants are referred to as players. game theory’s usual references to players will instead be companies.” comments Band. ‘Average annual growth in consumer spending on ethnic packaged foods in Europe has been running at 14 per cent since 1999 – a rate far higher than 5 per cent in the US.Chapter 3: The marketing environment and a game theory perspective on competition Figure 3. It uses the metaphor of a game to describe this situation. Then explain what impact this is having on the marketing activities of the firms in that industry. describe any political. Although such games cannot reflect all aspects of real life.’5 The marketing impact of this information would be on producers of ethnic cooking ingredients.1: Macro and micro environment Activity Choose an industry about which you can get information from either newspapers or books. consumer markets analyst at Datamonitor.

under these assumptions. Firms within a game choose strategies by rationally examining available information. we shall consider some of the basic models and then show how they can be used in actual marketing situations. The prisoners’ dilemma Two prisoners are accused of committing a robbery together. since the optimal strategy for both would be not to confess. If both confess. so reducing the overall profitability of the industry. we discuss the basic models and concepts of game theory. • The optimum decision for a player will depend on how the other player(s) will react and. and the other receives a five-year sentence. • Players are rational – they can calculate pay-offs correctly and will select the ones that maximise individual reward. the expected pay-offs and their expectations of other players’ decisions. the one who confesses is released. If all firms competing in a particular market co-operate to maintain prices at a high level. which are known to the firms involved: • a defined set of possible courses of action for the firms • identifiable preferences of each firm among the possible outcomes of the game • relationships whereby outcomes are determined by firms’ choice. The lessons from this game are very wide-ranging. The basic models First. The importance of the prisoners’ dilemma game lies in showing how independent decision-making can lead to inferior results for the players. Games consist of the following characteristics and conditions. its rivals will have to follow suit. Each player will identify the rational self-interested decision that gives the best pay-off no matter what the other player decides to do. the objective is to identify marketers’ optimal decisions under conditions of uncertainty and interdependence. In such cases. therefore. they would end up being worse off.141 Principles of marketing The assumptions made by game theory are as follows: • Players are self-interested in that they try to maximise their own payoff from the game. They are held in separate cells and cannot talk to each other. In a marketing context. • Price control. collective or co-operative decisions are more effective from the players’ point of view. each prisoner may feel that if they followed this strategy and the other person confessed. In this section. If neither confesses. they receive one-year sentences for a lesser crime. it requires a dynamic and interactive approach to strategic decision-making. 28 . The resulting equilibrium is the combination of best strategies for each player. The model highlights how individuals can actually become worse off when they pursue self-interested decision-making. they receive three-year sentences. It is relatively easy to show that. and by considering the actions open to them. knowing that their competitors will do so. However. We explore their relevance to marketing in the next section. overall profitability is maximised. the best decision for each prisoner (the dominant strategy) is to confess. But if one firm decides to drop prices (this is called defecting) to increase its market share. and they can be applied to many areas of marketing. If one confesses to the robbery and the other does not.

g. Nevertheless. however. There are lots of examples of this in the commercial world. If all firms competing in a particular market co-operate to develop new standards.Chapter 3: The marketing environment and a game theory perspective on competition • Product development. But if every farmer does this. however. the ability of any individual company to differentiate its offering is reduced. In summary it explains how alliance-forming in the video market by JVC enabled the company to have its standard VHS format accepted.udel.dmnews. since too many cows will eat all the grass. • See also www. There are other means of ensuring co-operation. html (last accessed 29 April 2009) for a discussion of how game theory can be an important consideration in direct marketing. means that the wider community is able to 29 . each farmer’s goal is to maximise the selling weight of the cow at the end of the season. the benefits brought about by the collaboration mean that the new standard can sell to many more people and thereby become accepted. The restriction on the rights of individuals. but the benefit is that the gains for the wider community are 34403. there are countries where the laws may seem restrictive to others. What measures have or could be taken to ensure that the outcome comes closer to maximising the common good? Commentary Planning and building laws restrict the ability of individuals and firms to build their homes and shops however they like. especially in developing countries where people pursue their personal interests without regard for the long-term pay-off for everyone and where governments may be too weak to impose regulations that people have to follow. Activity Give some examples of ‘standards’ that have helped competitors in an industry.html#sta (last accessed 29 April 2009). At the start of the game farmers agree that they should each only keep one cow there. and government regulation does not always achieve the desired outcome. the land will become overgrazed and each cow will weigh less than it would have done if everyone had stuck to the original arrangement. In a firm that makes many different brands of breakfast cereal). The tragedy of the commons In this game farmers keep their cattle in a field (a common). Answer The following website gives an example of how standards can be commercially important: www. Activity Identify current examples of the tragedy of the commons. The tragedy of the commons is that the dominant strategy to maximise the common good is not the same as that to maximise the individual good. even though the competitor format developed by Sony was widely considered to be technically superior. for example in mobile phones. The example given is important not just in the direct marketing context discussed but also in a wider range of situations where a firm can be releasing products that compete with each other (e. The tragedy can only be avoided by government intervention through regulation – to restrain overuse. without coercion. so they will each have an incentive to make themselves better off at the expense of the other farmers.

It is essential. But if the players are expanded to include the buying public. Zero-sum games Zero-sum games are those where one player’s gains can only be at the expense of the others. to be clear about the boundaries of the ‘game’ that you are analysing and take into account the different players who are involved. However. the advertising and promotional efforts of the different competitors meant that consumers were educated about the benefits of the new format. • The introduction of new technology may be seen by firms as zerosum in the short term. Three further points need to be made: 1. 2. • In international marketing. This means that if people co-operate they can all gain.141 Principles of marketing gain from better planned towns and cities. regional trade agreements lower trade barriers. Activity Are the prisoners’ dilemma and the tragedy of the commons. people knew very little about the technology. The status of a game can vary according to how the players are defined. depending on the different combinations of moves they make. are all non-zero-sum games. and offer no benefit from co-operation. Non-zero-sum games Non-zero-sum games (which are also known as positive-sum games) are those in which the total combined score of the players can vary. Where shops adhere to such laws the shopping experience can be more rewarding than situations where people have been able to expand their businesses however they like. and the examples of their application. Thus co-operation between competing stores to maintain prices will be seen as non-zero-sum for the participating stores. Zero-sum games are win–lose. thereby increasing competition for firms in individual countries. it can become non-zero-sum. therefore. which is why co-operation can evolve. As a result of their combined activities the firms were able to increase the rate of expansion of the market than would have been the case if they had been operating alone and as a result all firms gained. 30 . since all that happens is that they lose sales of existing older products. But if it leads to increased market share and accelerated growth. Certain types of examinations are examples of a zero-sum game. If one candidate gains a first. there is less for everyone else. In marketing the competition for market share can be seen as a zero-sum game: if one firm wins a 30 per cent share of a market. Other examples of non-zero-sum games include the following: • When firms launched mp3 players. But economic growth in all countries will be stimulated as a result of the change and all companies stand to benefit. In such examinations there are only a limited proportion of firsts and upper seconds. zero-sum games or nonzero-sum? Answer The prisoners’ dilemma and the tragedy of the commons. it means that there is one fewer first-class result available for the other players (or students). the game will be zero-sum – the increased profit to the stores will be at the expense of higher prices to the customers.

(Axelrod. on the other hand. It is possible to establish co-operation in various ways. Non-zerosum games.126–30) 31 . They knew their interactions would continue because no one was going anywhere… This prolonged interaction allows patterns of co-operation which are based on reciprocity to be worth trying and allows them to become established. However. This is because the players can use an implicit threat of retaliation against the other’s defection – if the interaction will last long enough to make the threat effective… There are two basic ways of doing this: by making the interactions more durable. Most countries have enacted legislation against collusion. even where direct communication is not possible. pp. Forgiveness helps restore mutual co-operation. 1990. The first. and most obvious. offer the participants potential benefits from co-operation. matched by the equally obvious disadvantages to the paying public. The advantages of collusion to oligopolistic suppliers are obvious. Another way to enlarge the shadow of the future is to make the interactions more frequent. and by making them more frequent… Durability of an interaction can help not only lovers. regulation of the advertising industry may bring long-term benefits (as firms who make false claims for their products are forced to stop) but will be seen as a zero-sum game by advertisers in the short term.Chapter 3: The marketing environment and a game theory perspective on competition 3. which means that for some of the players even a non-zero-sum game may appear as zero-sum in the short term. Co-operative games Zero-sum games are always going to be non-co-operative: win–lose offers no opportunity for mutual benefit to be derived by co-operation. For example. is through direct communication between the parties. There may be time-lags in the generation of benefits. Retaliation discourages the other side from persisting whenever defection is tried. The most striking illustration of this point was the way the live-and-let-live system developed during the trench warfare of World War I… The same small units of troops would be in contact with each other over extended periods of time. Axelrod (1990) identifies four principles that can make for an effective strategy – being: • nice • retaliatory • forgiving • clear. but enemies. The challenge is how to establish the conditions and processes whereby co-operation can be achieved. Eliciting co-operation can be achieved through the following methods: Enlarge the shadow of the future… Mutual co-operation can be stable if the future is sufficiently important relative to the present. Niceness prevents a player from getting into unnecessary trouble. and hence the next move looms larger than it otherwise would… frequent interactions promote stable cooperation. co-operation can be established through reciprocity and a pattern of behaviour. prohibiting cartels among companies. In such a case the next interaction occurs sooner. And being clear makes it obvious to the other companies which strategy a firm is adopting and this can help develop long-term co-operation.

This will reinforce the market strength of the larger player and place the smaller company at an ever-increasing disadvantage. It is referred to as signalling and it is widely used by commercial organisations to make their competitors aware of their intentions without actively colluding (which can be illegal in many countries). strategically. but it asks no more for oneself than it is willing to concede to others. A further tactic for establishing co-operation can be to make your strategy very clear to other player(s) from the start. The driver who turns into the passing space loses (the chicken). for example. which is the same payoff it gets for itself when both strategies are doing their best. These models help to identify the characteristics of situations when these different strategies may be relatively effective. An example used to illustrate this is the game of ‘chicken’ (Axelrod. A strategy based on reciprocity can allow the other player to get the reward for mutual co-operation. And not only does it help others. for example. so that there is no chance for the opponent to receive false signals about the willingness to respond to defection. informal collusion to avoid price competition will bring four times the benefit to the larger player. effective co-operation depends on the direct or indirect exchange of signals among players. 32 . Summary The firm is affected by both its microenvironment and the macroenvironment. Signals are more likely to be given – and therefore co-operation is more likely to be achieved – in a game with multiple rounds. if one store has 80 per cent of the market and the other 20 per cent. In such games firms can develop and signal a pattern of behaviour. Retaliation should be proportional but immediate.141 Principles of marketing As well as enlarging the shadow of the future. In this situation the smaller company may choose not to co-operate. even in a non-zero-sum game. It helps others by making it hard for exploitative strategies to survive. Two cars are driving fast towards each other along a one-lane road with one passing space in the middle. Axelrod suggests that participants should base their code of practice for interactions on reciprocity (an eye for an eye. In a price war. The macroenvironment comprises the wider societal forces which determine the opportunities and threats facing a firm. but others as well. rather than turning the other cheek). leading eventually to its elimination. it may still be in one party’s interests to reject co-operation. This analysis can be used to understand why relationship marketing can be effective. Game theory presents a number of models which show how it may pay competitors to cooperate and/or cheat on each other. and it will continue to cut prices even though it knows that the larger company will retaliate since the cost of this price war will be four times greater for the larger company. Game theory also presents various ideas as to how firms can try and increase the possibility of co-operation. There are some situations in which. one driver should lock the steering straight ahead. The characteristics of the marketer’s microenvironment affect its ability to serve its customers. 1990). This will ensure that the other driver gives way! This shows a benefit of making your strategy clear in advance. To be sure of winning. take off the steering wheel and throw it obviously out of the window. Who the long-term winner will be will depend on the relative resources available to each. where there is a large disparity in size or strength among the players and the benefits of co-operation are spread unevenly among the players. As we can see from the above discussion. Reciprocity can actually help not only oneself.

What are the main components of the microenvironment of marketing? With respect to each of these components identify the major questions that the marketer should be asking him/herself when carrying out an audit of the microenvironment. Sample examination question 1.Chapter 3: The marketing environment and a game theory perspective on competition A reminder of your learning outcomes By the end of this chapter. and having completed the essential readings and activities. 33 . you should be able to: • distinguish between the micro and macroenvironment of a firm • describe how the different elements of the micro and macroenvironment affect firms’ marketing activities • distinguish between zero-sum and non-zero-sum games and the implications for competitive behaviour • explain the different methods firms can use to elicit co-operation.

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