Bargaining with Bayesian game theory

A consumer goods company was suffering from serious profitability challenges in a key category. We harnessed Bayesian game theory and dynamic programming to optimize their contract pricing strategy and to turn around category profitability.

Challenge

The consumer goods company was suffering from serious challenges in a key product category and needed an immediate commercial turnaround to bring the category back to health. Aggressive price competition and expanding bargaining power of dominant retailers had destroyed profit margins.

Brave the future

We dug deep into our economics and analytics toolkit to develop a unique pricing approach that would 1) account for the intricacies of the production set-up and the competitive situation, 2) dynamically optimize pricing under substantial uncertainty about competitor behavior, and 3) yield a pragmatic game plan that provides clear guidance throughout the entire contracting sequence. Working closely with the sales and controlling organizations of our client, we created a thorough understanding of the strategic game being played. Our solution used Bayesian game theory and dynamic programming to deliver an optimized pricing plan for all upcoming negotiations.

Impact

The initiative had an incredibly short payback period as the new approach delivered a substantial profit improvement right away from the initial contracting period. In addition to the immediate bottom line impact, the initiative helped improve the client’s analytical and pricing capabilities, which should drive profitability in the future.