Essay Judo Economics

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PROBLEM SET # 3 JUDO ECONOMICS The Problem is premised on the following phased structure; | Decision Maker | Decisions To Be Made | Stage 1 | Entrant | Whether to enter or opt out | Stage 2 | Entrant | Set up the price(Pe) and the number of target customers(T) | Stage 3 | Incumbent | Whether to fight or accommodate; 1) Price war 2) Set up the price for remaining customers (100-T) | Stage 4 | Buyer | Consumers buy from whoever offers them the highest surplus. There is no cost to capacity. | The Entrant’s strategy in Q No.1-3 have been chalked out through the technique of “looking forward and reasoning backward” i .e. in the light of what the other party namely Incumbent may do under different circumstances QUESTION 1:…show more content…
And the maximum payoff (as per [3] above) for serving 50 customers will be (150 – 100) x 50= $2500. QUESTION 2: ASSUMPTIONS: * Each buyer is willing to pay $200 for one unit of the Incumbent’s (I) AND $160 for the Entrant’s (E) product * I and E have a $100 and $120 unit cost respectively * In view of Stage 2, only buyers targeted by the Entrant can buy there from while the rest can only purchase from the Incumbent. POSSIBLE SCENARIOS * If the Entrant opts not to enter * Entrant may save a nominal, irrecoverable entry cost but the payoff will be 0. * The Incumbent will reap the entire profit which will be (200 – 100) x 100 = $10000 * If the Entrant does enter two possibilities; accommodation or price war * If the Incumbent opts to fight, it may benefit from the Entrant’s higher unit cost and therefore still capture the entire market though at less profit margin. Since the willingness to pay for the Incumbent is $40 more than that for the Entrant, the former can fix any price at 40 more than whichever price fixed by the Entrant. So for any price fixed by the Entrant (Pe),the Incumbent’s price will be given by, Pi = Pe + 40 ∏i = (Pe + 40 – C) x 100 ∏i = (Pe + 40 - 100) x 100 = 100 x Pe –6,000 -------------------- [1] * Opt to accommodate the incumbent the target of the Incumbent will just 100-T customers.

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