In game theory they talk about deciding your move based on what rational opponents would react. A variant of that strategy is to convince your opponent that you are no where near rational so they better not expect you to do the rational reaction to your action.
For example if you are playing a game of chicken in cars, if you were to break the steering wheel and toss it out the window in front of your opponent then he knows you are not going to swerve. (source: Art and Science of Negotiation). That is strategic irrationality.
In the game of chicken played in retail prices, Amazon is such a strategically irrational player. A recent BusinessWeek article screams
Amazon’s Jeff Bezos Doesn’t Care About Profit Margins
Mr.Bezos has signaled to all other players that he has thrown away his steering-wheel and placed a brick on his gas pedal. They are not going to let up on lowering prices and they can keep at it as long as they can because they have the full trust of their shareholders.
The right move in this game is not to do exactly the same and agreeing to match prices. But other retailers don’t seem to get it.
Target is the latest retailer who decided to play the price matching game not realizing their opponent’s stated irrationality. Target announced they will match all Amazon prices if customers can show proof.At least, unlike BestBuy’s mistake of making it easy for customers to get the price match, Target has added manual steps for customers. But that isn’t enough to stop the bleeding – either customers will do that additional work or simply go to Amazon.
If one player in a market says they will match any lowest price in the market the rational move for others is not to lower their prices because they get no advantage from it and only erode their margins. But Target is not dealing with rational player.
Fundamentally, by agreeing to match Amazon prices, they are saying their store provides no unique products, no unique value and is undifferentiated from an online store. The right strategic move would be to ask,
“what unique value the store provides to its target customers and what is the right product mix that makes the customers buy from them”.
Even if this would result in severe revenue reduction – because they end up eliminating many products from their shelves – in the long run it would help make Target a profitable venture.
Instead they chose to play the game of chicken with with an opponent who has given up on steering.
This isn’t going to end well for Target. Circuit City here we come.