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Strategic Dominance in Video Game Industries

Consider a situation where two companies, called Startoops and Megadork, are competing in a new market.

This market has one product which is sold in two different versions: the simple consumer version and the complex professional version. Both versions of the products are equally profitable for the company selling them. Most people in the market (80%) are interested in the consumer version, and only a few (20%) are interested in the professional version.

Each company can decide whether it wants to sell the consumer version or the professional version of the product. If both companies decide to sell the same type of product, then the two companies have to split the market for that product. Otherwise, each company has the full consumer or professional market for itself.

As such, each company has two possible strategies to choose from, and there are four possible outcomes to the scenario:

  • Both companies enter the consumer market. This means that the companies split the consumer market (which accounts for 80% of the total market share), and that each company therefore gets 40% of the total market share.
  • Both companies enter the professional market. This means that the companies split the professional market (which accounts for 20% of the total market share), and that each company therefore gets 10% of the total market share.
  • Startupo enters the consumer market, and Megacorp enters the professional market. This means that Startupo gets the full consumer market (80% of the total market share), and Megacorp gets the full professional market (20% of the total market share).
  • Megacorp enters the consumer market, and Startupo enters the professional market. This means that Megacorp gets the full consumer market (80% of the total market share), and Startupo gets the full professional market (20% of the total market share).

Based on this, if a company chooses to enter the consumer market, they know that they will get either 40% or 80% of the total market share. Conversely, if a company chooses to enter the professional market, they know that they will get either 10% or 20% of the total market share.

Accordingly, for both companies, the dominant strategy in this scenario is to enter the consumer market, since regardless of which move the other company makes, they will end up getting a bigger portion of the market share this way.

Conversely, for both companies, the dominated strategy is to enter the professional market, since regardless of which move the other company makes, they will end up getting a smaller portion of the market share this way.

Note that this scenario can become more complex by adding more variables which frequently appear in real life, such as additional players, additional products, and different profitability margins for different markets. However, though these additional factors make the computations a bit more complex, the fundamental idea behind dominant and dominated strategies remains exactly the same.

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