Analysis of E-commerce Platforms’ Price War: Based on Game Theory Model

Abstract

Based on the fact that T-mall and JD.com, two major e-commerce platforms, reduce prices significantly every year in the shopping festival, but still can obtain high profits, this paper explains the causes and profit mechanism from the perspective of game theory. Meanwhile, this article builds a Bertrand model to analyze the profit mechanism of the two firms. The Nash equilibrium is (Discount, Discount) until they drop their prices to 0, which is obviously against the reality that both companies can gain high profits during the shopping festival, and consumers can also buy goods at lower prices. Therefore, there is a possibility of a collusion between the two firms. Finally, this paper introduces trigger strategy, the conclusion is that the two companies can make profits in the long run as long as they cooperate with each other. In addition, from the perspective of consumers, e-commerce platforms and the government, this paper also gives a reasonable decision-making strategy in the shopping festival. This research not only provides promotion programs for e-commerce platforms, but also helps consumers understand the profit mechanism of e-commerce platforms. At the same time, the government can also get inspiration from it, such as setting a minimum price to avoid the disruption of market order by vicious competition.