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Game Theory of Selling Cigarettes

Recently, CVS announced that it will stop selling cigarettes in its chains  by October 1st to try and rebrand itself. With pressure from many public officials and the health conscience groups CVS looks to capture a new market in its rebranding. This has left comparable competitors,  Rite Aid and Walgreens, in a game of who will be the second mover.

Since CVS left the market, comparable firms have a chance to gain the market share that was left by CVS and if another moves, then the firm that stays will have all market share in this comparable space. For Walgreens and Rite Aid, the first one who decides to leave the space,and stop selling cigarettes, will have nothing while the one who stays will gain all the revenue and market share for the space. If both firms stay in the space then they lower the total amount that they could make if only one firm was in the space. The last options is that both firms leave the space and give up on cigarette revenues.

 

The Game looks something like this (numbers are fictional)

Walgreens
Sell Don’t Sell
Rite Aid Sell 5,5 12,0
Don’t Sell 0,12 0,0

The best way for both companies to not incur long-term losses would be for them to stop selling cigarettes at the same time. This is because negative public relations from continuing to sell cigarettes could hurt the firms so to stop selling would be beneficial for long-term prosperity.  The game would indicate that both selling would better but other real-life consideration shows that more consumer friendly branding is better.

 

Article Link: http://www.businessinsider.com/pharmacies-cigarettes-and-game-theory-2014-3

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