This paper deals with the question whether the framework of the prisoners’ dilemma applies to the context of pricing in the German discounter fitness industry. It addresses the issue of the prisoners' dilemma and possible solutions. Furthermore, the author assesses the German discounter industry as well as current trends within the industry. The concept of the prisoners' dilemma is applied to the German discounter fitness industry to demonstrate that the pricing strategies of McFit and FitX, Germanies leading players in the discounter fitness segment, can be modelled using the game-theoretical approach. Lastly, a possible solution can be explained by the repetitive nature of the "game".
The fitness industry in Germany developed remarkably in the last one and a half decades. Between 2003 and 2017, the number of active members rose from 4.38 million to 10.61 million making it the most popular sport in Germany concerning members. The main reason for the enormous increase in members is the rising health awareness among the German population. Society further agrees that becoming active and working out has a positive impact on well-being, health, and mobility especially for older adults.
Increasing demand fosters rivalry within the industry as all competing firms want to benefit from the high demand and bind potential customers to long-term contracts. The high interest on the consumer side can result in price wars as the rewards immediately gained from cutting the price are high. Even though price cutting may be beneficial in the short run, the long-run consequences of price wars are decreasing profits within the industry.
The fight on prices seems especially present in the discounter chain segment as gyms are homogenous, and differentiation amongst the competitors in this segment is somewhat limited. Thus, competing on price could be the instrument chosen by firms engaging in the discounter fitness sector to attract new members, increase market share, and raise short-term income while simultaneously putting long-term profitability at risk.
Table of Contents
1 Introduction
1.1 Motivation and Problem Definition
1.2 Research Question and Objectives
1.3 Course of Investigation
2 Theoretical Background
2.1 The Prisoners‘ Dilemma
2.2 The Application of the Prisoners’ Dilemma in Pricing
2.2.1 Example: T-Shirt Retailer
2.2.2 Example: Two Restaurants
2.2.3 Price Wars as a Consequence of Price Cutting
2.2.4 The American Airline Industry as an Example
2.3 Solving the Prisoners’ Dilemma According to Theory
2.3.1 Rewards Approach
2.3.2 Repeated Games
2.3.2.1 Finite Repetition
2.3.2.2 Infinite Repetition
2.3.2.3 General Theory
3 The German Fitness Industry
3.1 General Development Within the Industry
3.2 Market Characteristics of the Chain Segment
3.2.1 Porter’s Five Forces
3.2.2 Defining the Target Firms
3.2.2.1 McFit
3.2.2.2 FitX
4 Application of the Prisoners’ Dilemma to the Fitness Industry
4.1 Rebuilding the Prisoners’ Dilemma
4.1.1 Assumptions for the Model
4.1.2 Mutual Cooperation
4.1.3 Unilateral Defection of FitX
4.1.4 Unilateral Defection of McFit
4.1.5 Mutual Defection
4.2 The Applicability of the Prisoners’ Dilemma
4.3 Solving the Pricing Dilemma of FitX and McFit
4.3.1 Rewards Approach as a Solution
4.3.2 Repetition as a Solution
4.3.2.1 Does Defecting Pay Off for FitX
4.3.2.2 Does Defecting Pay Off for McFit
4.3.3 Outcome and Implication
5 Conclusion
5.1 Comparison with the Real Rivalry Between FitX and McFit
5.2 Limitations and Further Research
6 References
Research Objectives and Key Topics
The primary objective of this thesis is to examine whether the game-theoretic framework of the prisoners' dilemma is applicable to the pricing strategies observed within the German discounter fitness industry. By modeling the rivalry between major market players as a strategic game, the research aims to determine if the companies are caught in a sub-optimal equilibrium and explores potential solutions to this pricing dilemma.
- Application of the prisoners' dilemma model to oligopolistic market structures.
- Analysis of competitive dynamics in the German discounter fitness sector.
- Evaluation of pricing strategies, including the consequences of price wars.
- Assessment of theoretical solutions to the dilemma, such as repeated games.
- Comparison of theoretical findings with real-world industry behaviors of major chains.
Excerpt from the Book
2.1 The Prisoners‘ Dilemma
The prisoners’ dilemma is one of the most known examples of game theory. According to Kuhn et al. (1996), Al Tucker came up with the prisoners’ dilemma in 1950 while he was on leave at Stanford. A psychology professor approached him and asked whether he could give a seminar on his work concerning game theory. Tucker used the prisoners’ dilemma as an example of the “attendant paradoxes of non-socially-desirable equilibria” (Kuhn et al., 1996, p. 155) and inspired dozens of research papers and books (pp. 154-155).
Dixit, Skeath, and Reiley (2015) describe the prisoners’ dilemma as a situation in which two people are accused of having committed a murder. Since the prosecutors lack sufficient evidence and could only charge them three years for kidnapping, they rely on the help of the accused to confess the major crime. Now each of the prisoners has two options. One can either admit or deny the murder. Since the police interrogate both prisoners in separate rooms, they cannot communicate with each other. Depending on the choices each of them makes, they will either be convicted of murder or kidnapping only. If both prisoners admit, they will be sent to jail for ten years each. If only one captive concedes while the other denies, the one confessing will get a short sentence of one year for cooperating, while the other will face 25 years in jail. If both decide to stay silent and deny, each of them will be punished with three years in prison (Dixit et al., 2015). Table 1 summarizes the choices and outcomes for this game.
Summary of Chapters
1 Introduction: Provides the motivation for the study, defines the problem of price competition in the German fitness industry, and establishes the research objectives and the course of investigation.
2 Theoretical Background: Introduces the core concepts of the prisoners’ dilemma, its application to pricing and price wars, and discusses theoretical strategies for resolving such dilemmas, including the rewards approach and repeated games.
3 The German Fitness Industry: Analyzes the market development, the high level of competition, and identifies the key target firms (McFit and FitX) through the lens of Porter’s Five Forces.
4 Application of the Prisoners’ Dilemma to the Fitness Industry: Rebuilds the prisoners’ dilemma using industry-specific data, models the revenue outcomes of cooperative vs. defective pricing strategies, and evaluates the applicability of the dilemma to McFit and FitX.
5 Conclusion: Compares the theoretical model with the actual market rivalry between FitX and McFit, discusses real-world strategic adaptations, and addresses the study's limitations and areas for future research.
6 References: Lists all academic and industry-specific sources used throughout the thesis.
Keywords
Prisoners' Dilemma, Game Theory, Fitness Industry, Price Competition, Price War, Oligopoly, McFit, FitX, Strategic Management, Repeated Games, Nash Equilibrium, Market Pricing, Revenue Optimization, Competitive Strategy, German Fitness Market.
Frequently Asked Questions
What is the central focus of this thesis?
The work focuses on applying the game-theoretic "prisoners' dilemma" model to the pricing strategies of the German discounter fitness industry, specifically analyzing the rivalry between major chains like McFit and FitX.
What are the primary themes addressed in this study?
Key themes include the economics of fitness chains, the mechanics of price wars in oligopolies, the role of strategic cooperation versus defection, and the application of theoretical game models to real-world business scenarios.
What is the core research question?
The central question is whether the prisoners' dilemma framework effectively explains the pricing decisions in the German discounter fitness market and if the companies are trapped in a sub-optimal outcome.
Which scientific methods are employed?
The research uses a qualitative industry analysis combined with a quantitative, game-theoretic modeling approach, applying profit function calculations to compare cooperative and non-cooperative pricing strategies.
What does the main body of the work cover?
The main body covers the theoretical foundations of game theory, a detailed industry analysis using Porter's Five Forces, a specific mathematical modeling of the pricing rivalry between FitX and McFit, and a critical discussion of solutions like repeated games.
Which keywords best characterize this work?
The work is best characterized by terms such as prisoners' dilemma, game theory, price competition, oligopoly, and strategic management within the German fitness sector.
How does the contract structure of gyms influence the pricing dilemma?
The thesis highlights that the standard one-year contract structure limits the immediate switching of customers, which creates a specific temporal dynamic that influences whether defecting on prices is beneficial for the firms.
What is the significance of the "repeated game" concept for these fitness chains?
Since the market rivalry occurs over an ongoing, long-term period rather than as a one-shot event, the potential for future retaliation—such as a competitor launching a price war—serves as a stabilizing factor that discourages individual firms from aggressively cutting prices.
- Citation du texte
- Moritz Moerke (Auteur), 2018, Pricing Strategies in the German Discounter Fitness Industry. The Prisoners’ Dilemma, Munich, GRIN Verlag, https://www.grin.com/document/943445
