Jabong vs. myntra Discount Wars Game Theory (Analyzed as on 2014)

Game Theory Term Paper – “E-Commerce Discount Wars (Myntra Vs. Jabong)”

Game Theory Term Paper – “E-Commerce Discount Wars (Myntra vs.

Jabong)”

Radhika Singh PGP/17/357Rohit Dhall PGP/17/342Chand Ajmera PGP/17/192


Executive SummaryPrice has always been a handy tool used by companies with undifferentiated products in the battle for market share. A price war is said to have initiated when two or more companies continually lower prices to undercut each other’s market share

Even though theories suggest that Price wars can be loss-loss for both the parties, price wars are becoming increasingly common because it is quick, easy and reversible action. In some cases, price wars can alter the industry structure as a whole but there are evidences that prove the contrary as well. Many a times resorting to price war is not the only available option to gain the upper hand, changing the game is an alternative option which can help avoid losses to the company as well as to the industry

The scope of this term paper is to use Game theory to analyze the price war game currently being played between two ecommerce fashion and apparel players Myntra and Jabong and also predict the future implication of the games currently being played. It will help in deciding whether indulging into price war makes sense to the firm and how can the price war be fought or avoided at first place by the firms.

We have designed two games taking into consideration profit and revenues as pay-offs. Both the players have four moves at their disposal: Discount, Discount + Back-Up Plan (give less discount now but invest in alternative strategies), No Discount and Collude. The Nash equilibrium for the game with profit as pay-off turns out to be (No Discount, No Discount) while for the game with revenue as pay-off turns out to be (Discount, Discount). But since the current focus of both the players is acquiring and maintaining the customer base, they will resort to playing Game No. 2.

Further analysis suggested that if (Discount, Discount) is played in an infinitely repeated game then the relatively patient player (in this case, Jabong since it has strong financial back-up) will be able to survive as well as get higher share of the pie. So the best option for Myntra is to avoid price war and signal Jabong that it is ready to compete on other parameters like Variety, No of vendors, Quality of vendors acquired and Customer Service. In the hindsight, given that Jabong is highly unpredictable player, Myntra should build up a superior cost structure and capabilities so that it can combat future price wars more effectively.

Introduction Myntra: It is an Indian online shopping retailer of fashion and casual lifestyle products, headquartered in Bangalore, Karnataka. It was established in 2007 and has been funded by Venture Capital funds like Tiger, Kalarri, Premji Invest, IDG & Accel Partners. From 2007 to

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2010, it was providing personalized products like keychains, mugs, greeting cards, calendars, etc. However in 2010, it ventured into retail fashion and lifestyle products. Myntra currently offers products from more than 600 brands. Myntra’s current market is valued at 1000 crore Rs. Following table gives the market share of Myntra over the years 2009 to 2013.

2009 2010 2011 2012 2013

1.9 2.3 2.6 3.4 4.1

Myntra has come up with many private label brands recently and is planning to increase the share of the same. The contribution margin from private label brands is 60% and from the featured brands is 20-30%. In 2013, Myntra acquired San Francisco based company which is a developer of 3D virtual fitting technology. Moreover Hrithik Roshan’s apparel brand HRX will be a featured brand store in Myntra. It aims to become 2800 million dollars Fashion Company by 2020.

Jabong: Jabong, an online retailer of fashion and lifestyle products, was established in 2012.Jabong has been incubated by a German Company, Rocket Internet founded by three Internet billionaires. Jabong currently offers more than 1000 brands. The annual revenue of Jabong is estimated to be approx. 750 Crore Rs. Jabong has been known for growing to 3/4th of Myntra’s size in just 15 months and it is known for running intensive marketing campaign. According to the founder of Myntra, Jabong has the habit of replicating Myntra’s moves and sometimes while hurting Myntra, it hurts itself too. Jabong has recently partnered with Rohit Bahl and NBA for retailing their merchandise.

Discount/Price Wars Game

Response AvailableBoth the players have 4 moves at their disposal.

Give Discount ( D ) – A player will play D i.e. give discount on its products to acquire new customers even though its contribution margin will be lower than in case when it doesn’t give discount

Give Discount + Back Up Plan ( D’+ BP) – A player will play D’+ BP where D’< D i.e. it will give a lower discount and will use the remaining cash to invest in future back up plans like building up logistics & infrastructure , tying up with brands exclusively etc.

No Discount (ND) – A player will give no discount and will maintain price Collude (C) – A player will join hands with the other player involved and resolve to

maintain price

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Financial Performance & Non-financial Performance of PlayersFinancial Performance:

Statistics Jabong Myntra

Revenue 750 cr. 1000 cr.

Revenue / pm 625000000 (62.5 cr.) 833333333.3 (83.3 cr.)

No. Of transaction /Month 4,20,000 2,40,000

Overall Apparel Market 16910 cr.

Overall Apparel Market – Jabong- Myntra

15160 cr.

Non-Financial Performance: To understand the non- financial performance of both the players we evaluated them on the following basis:-

Ratings Myntra

Jabong

Variety 8 8No of Vendors

7.5 9

Service 8 7User Interface

9 9

Marketing 8 9Price 7.5 8

Overall Rating

8 8.333333

In traditional discount / Price war game (where the products are homogenous), if one player reduces price and the other does not, the latter will lose all its market but given in this case the products & services are not homogenous and therefore the market is not driven totally by price, only x% of the customers will move to the player giving higher discounts.

Assumptions & Rules of the Game Assumption 1: 60% of the Consumers of Myntra is price sensitive and therefore will

switch to Jabong in case Jabong gives discount and Myntra doesn’t.

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Since rating of Jabong is 8.33 and that of Myntra is 8, hence the similar switch % for Jabong will be equal to 57.6% (60*8/8.33) i.e. only 57.6 % will switch to Myntra in case if Myntra gives a discount and Jabong doesn’t

Assumption 2: In case of discount, apart from acquiring customers from each other, they would be able to acquire 10% of the remaining apparel market. In case both the players play (discount, discount) the newly acquired market will be split equally among both of them

Assumption 3: We have assumed a similar contribution margin for both the players. Given below are the details

Move Contribution Margin ( Profit/ Sales)%D 5%

D+BP 5% ( Less Discount but the remaining is invested for future developments)ND 35%C 35%

Assumptions 4 : In case Myntra decides to play D+BP ( give discount but not as much as Jabong + Invest in future) it will be able to retain 65.71% of the customers ( only 34.29% will switch) while the similar no. for Jabong will be 67.43% ( Only 32.57% will switch)Calculation: Assuming Myntra Avg. discount Given (D=35%) while in case of D+BP move it is 20% now the % switch will beFor Myntra = 60* (20/35) = 34.29%For Jabong = 57.6* (20/35) = 32.57%

Assumption 5: In case both players (D,D), (D+BP, D+BP), Customers will not be inclined to switch to the other

Assumption 6: Additionally while when both players play (D,D) both will be able to acquire 10% of remaining apparel market, it will reduce to 7% if both players play (D+BP, D+BP)Other Cases:- In case players play (D, D+BP), they claim 10% market share distributed in the ratio

of their discount i.e. (35: 20) and vice versa- In case players play ( ND, D+BP), the entire 7% will be retained by the player playing

D+BP Assumption 7: In case both the players play (ND, ND) , both retain the market share Assumption 8: In case of Collusion

Case 1: If both players collude, they will lose 20% market, because the market is price sensitive. Both will share the revenuesCase 2: In case players play ( C, D) , the player playing collude will lose out 10 % more costumers because of its forever resolve to not give discount while the player playing D will get switched customers from Player A + 10% Acquired from remaining market

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Case 3: In case players play (C, D+BP) , the player playing Colludes loss will be same as before but the player playing D+BP will get Switched customers from A + 7% market share from B because of reduced discount

Game

Game with Profit as Pay OffMyntra

Discount Discount + Back Up Plan

No Discount Collude

Jabong Discount 6.28, 7.33 8.57, 5.04 11.94, 11.67 11.94, 8.57Discount + Back Up Plan

4.40, 9.20 5.34, 6.38 8.97, 19.17 8.97, 16.25

No Discount 9.41, 12.26 14.75, 9.6 21.9, 29.17 21.9, 26.25Collude 7.22, 12.264 12.56, 9.6 19.68, 29.17 20.42, 20.42

Calculation of payoffs:

Strategy Payoff Formula Calculation

Discount, Discount

= (Current Market Share + Proportion of newly acquired market share)/12 *Contribution Margin during discounts (For both the firms)

= ((750 + 1516/2)/12)*0.05

= ((1000 + 1516/2)/12)*0.05

= 6.28, 7.33

Discount, Discount + BP

= ((Current Market Share + Market share gained due to switching + newly acquired market share)/12)* Contribution Margin during discount

= ((Diminished Market Share)/12)*Contribution Margin during Discount + Back Up plan

= ((750 + 1000*0.342857 + 964.7273)/12)*0.05

= ((1000*(100-34.2857)/100 + 551.2727)/12)*0.05

= 8.57, 5.04

Discount, No Discount

= ((Current Market Share + Market Share gained due to switching + newly acquired market share)/12) * Contribution Margin during discount

= ((Diminished Market Share) / 12) * Contribution Margin

= ((750 + 1000*0.60 + 1516)/12)*0.05

= ((1000*0.40)/12)*0.35

= 11.94, 11.67

Discount, Collude


= ((Diminished Market Share) / 12) * Contribution

= ((750 + 1000*0.60 + 1516)/12)*0.05

= ((1000*0.30)/12)*0.35

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Margin = 11.94, 8.57

Discount + BP, Discount

= ((Diminished Market Share + Newly Acquired Market Share)/12)*Contribution Margin


= ((750(100-32.57)/100 + 551.27 ) / 12) * 0.35

= ((1000 + 750 * 32.57 + 964.73) / 12) * 0.05

= 4.40, 9.20

Discount + BP, Discount + BP

= ((Current Market Share + Newly Acquired Market Share)/12)*Contribution Margin

(For both the firms)

= ((750 + 1061.2/2)/12)*0.35

= ((1000 + 1061.2/2)/12)*0.35

= 5.34, 6.38

Discount + BP, No Discount

= ((Current Market Share + Newly Acquired Market + Market Share gained due to switching)/12)*Contribution Margin

= ((Diminished Market Share)/12)*Contribution Margin

= ((750 + 1061.2 + 1000*0.34286)/12)*0.35

= ((1000*(100-34.286))/1200)*0.35

= 8.94, 19.17

Discount + BP, Collude

= ((Current Market Share + Newly Acquired Market + Market Share gained due to switching)/12)*Contribution Margin

= ((Diminished Market Share)/12)*Contribution Margin

= ((750 + 1061.2 + 1000*0.34286)/12)*0.35

= ((1000*(100-34.286-10))/1200)*0.35

= 8.97, 16.25

No Discount, Discount

= ((Diminished Market Share) /12) * Contribution Margin

= ((Market share + Newly Acquired Market Share + Market Share gained due to switching) / 12) * Contribution Margin

= ((750*0.43)/12)*0.35

= ((1000 + 750*0.57 + 1516) / 12) * 0.05

= 9.41, 12.26

No Discount, Discount + BP

= ((Diminished Market Share) /12) * Contribution Margin

=((Market share + Newly Acquired Market Share + Market Share gained due to switching) / 12) * Contribution Margin

= ((750*(100-32.57))/1200) *0.35

= ((1000 + 750*0.3257 + 1061.2)/12)*0.35

= 14.75, 9.6

No Discount, No Discount

= (Current Market Share/12)* Contribution Margin

(For both the firms)

= (750/12)*0.35

= (1000/12)*0.35

= 21.9, 29.17

No = (Current Market Share/12)* Contribution = (750/12)*0.35

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Discount, Collude

Margin

= (Diminished Market Share/12) * Contribution Margin

= ((1000*0.90)/12)*0.35

= 21.9, 26.25

Collude, Discount

= (Diminished Market Share)/12) * Contribution Margin

= ((Current Market Share + Market Share gained due to switching + Newly acquired market share) / 12) * Contribution Margin

= ((750*(100-57-10))/1200 )*0.35

= ((1000 + 750*0.57 + 1516)/12)*0.05

= 7.22, 12.264

Collude, Discount + BP

= (Diminished Market Share)/12 * Contribution Margin

= ((Current Market Share + Market Share gained due to switching + Newly acquired market share) / 12) * Contribution Margin

= ((750*(100-10-32.57) / 100) / 12) * 0.35

= ((1000 + 750*0.3257 + 1061.2)/12)*0.35

= 12.56, 9.6

Collude, No Discount

= (Diminished Market Share)/12 * Contribution Margin

= (Current Market Share)/12*Contribution Margin

= (750*0.90)/12*0.35

= (1000/12)*0.35

= 19.68, 29.17

Collude, Collude

= Equal Division of Market Share = ((1000+750)/(12*2))*0.35

= 20.42

Game with Revenue as Pay OffMyntra

Discount Discount + Back Up No Discount ColludeDiscount 125.67, 146.5 171.4, 100.7 238.83, 33.33 238.83, 24.86Discount + Back Up

88.08, 184.08 106.71, 127.55 179, 54.76 179, 46.43

Jabong No Discount 26.875, 245.29 42.14, 192.12 62.5, 83.3 62.5, 75Collude 20.625, 245.29 35.89, 192.12 56.23, 83.3 58.33, 58.33

We see that if in case the payoff is calculated in terms of revenue, (Discount, Discount) is the Nash Equilibrium of this outcome, which is the game Myntra & Jabong are currently playing. In current times when the E-commerce market is said to grow from $1.8 bn. currently to $ 65 bn. each one of them is trying to maximize their revenue that is acquire more and more customers even though from profitability point of view both of them are worse off.

From the above two games, we can see from Game 1 that the profit-payoff for (Discount, Discount) is much lower compared to (No Discount, No Discount). A time may come when both

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of them will start moving towards (No Discount, No Discount) strategy as they start becoming cash trapped or even a situation may arise when either of the players might move out of the industry or get acquired by the other.

This outcome will depend upon the patience factor for each player. As we are aware that Jabong is financially strong as compared to Myntra, we assume that delta of Jabong is 0.9 and that of Myntra is 0.8. If price war game is repeated for infinite number of months, following will be the payoffs:

Jabong: 6.8*(0.9)/0.1 = 61.2

Myntra: 7.33*(0.8)/0.2 = 29.32

*difference in pay-offs is significant

Initially in the price-war game, the difference in pay-off of Jabong and Myntra in a one shot game is (7.33-6.28) 1.05 but if the game is infinitely repeated, then the gap increases ( 61.92-29.32= 31.88) Jabong (the one having strong back up from Internet billionaires) will survive but the situation of Myntra will be really bad. Also comparing the % share of the pie if both play (D,D) strategy shows that while in a one shot game the pie is distributed almost evenly ( 54:46) with Myntra getting larger share of the pie, in an infinitely repeated game Myntra will be worse off with just 32.4% of the pie.

Theories suggest that Price war games can be fought better if players can foresee trends and invest before hands in improving their cost structure, building stronger infrastructure and working on innovation. Keeping this theory in mind, let us find out how can (D+BP, D+BP) be the Nash Equilibrium.

Let us assume that “a” is the benefit or the return that Jabong expects by investing in future while “b” is the benefit that Myntra expects by investing in the future the new game can be written as

MyntraDiscount Discount + Back Up No Discount Collude

Discount 125.67, 146.5 171.4, 100.7b 238.83, 33.33 238.83, 24.86Discount + Back Up 88.08a, 184.08 106.71a, 127.55b 179a, 54.76 179a, 46.43

Jabong

No Discount 26.875, 245.29 42.14, 192.12b 62.5, 83.3 62.5, 75

Collude 20.625, 245.29 35.89, 192.12b 56.23, 83.3 58.33, 58.33(D+BP, D+BP) will be the Nash equilibrium if the following conditions are satisfied: -

A= (171.4/106.71)=1.606222 B= (184.08/127.55)=1.44

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This means that if Myntra sees 44% more benefit from investing in future and Jabong sees 60.62 % more benefit in future the equilibrium can be shifted to D+BP, D+BP

The new game would be: -

MyntraDiscount Discount + Back

UpNo Discount Collude

Discount 125.67, 146.5 171.4, 145.33 238.83, 33.33 238.83, 24.86Discount + Back Up

141.4761, 184.08 171.14, 184.08 287.51, 54.76 287.51, 46.43

Jabong No Discount 26.875, 245.29 42.14, 277.27 62.5, 83.3 62.5, 75Collude 20.625, 245.29 35.89, 277.27 56.23, 83.3 58.33, 58.33

ConclusionSo the best option for Myntra is to avoid price war and signal Jabong that it is ready to compete on other parameters like Variety, No of vendors, Quality of vendors acquired and Customer Service. In the hindsight, given that Jabong is highly unpredictable player, Myntra should build up a superior cost structure and capabilities so that it can combat future price wars more effectively.

*No. Of Words: (2752-593-50-50-50-50-25) =1934

BibliographyMargaret E. Slade, “Price Wars in Price Setting Super games”, The London School of Economics & Political Science

Rohin Dharma Kumar, “Myntra's Big Leap Forward“, Forbes India

Robert C. Blattberg, Gary D. Eppen & Joshua Lieberman, “A Theoretical & Empirical Evaluation of Price Deals for Consumer Non-Durables”, American Marketing Association

Tarek H. Selim, Strategic Pricing: A Game in Market Economics, American University, and Cairo, Egypt

Jubin Mehta, Can Game Theory help Indian E-Commerce Company Escape the Ridiculous Price Wars, Yourstory.in

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Jabong vs. myntra Discount Wars Game Theory (Analyzed as on 2014)

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