Consider a market with two firms, Target and Wal-Mart, that sell CDs in their musicdepartment. Both stores must choose whether to charge a high price ($30) or a low price(s13) for the new Miley Cyrus CD.These price strategies with corresponding profits are depicted in the payoff matrix to theright. Target's profits are in red and Wal-Mart's are in blue.TargetTarget's dominant strategy is to pick a price of SPrice = $30 Price = $13$7,000$2.500Price = $30S7,000$15,000Wal - Mart$15.000$5,000Price = $13$2,500$5,000Wal-Mart's dominant strategy is to pick a price of $The new equilibrium market wage will beand the new equilibrium market employment level will behigherunchangedlowerhigherlowerunchanged

Target dominant strategy is to pick a price of $13.

Consider a market with two firms, Target and Wal-Mart, that sell CDs in their music department. Both stores must choose whether to charge a high price (S30) or a low price ($13) for the new Miley Cyrus CD. These price strategies with corresponding profits are depicted in the payoff matrix to the right. Target's profits are in red and Wal-Mart's are in blue. Target's dominant stratogy is to pick a price of $O Price = $30 Target Price = $13 $7,000 $2.500 Price = $30 $7,000 $15,000 Wal - Mart $15,000 Price $13 $5.000 $2.500 $5,000 Wal-Mart's dominant strategy is to pick a price of $_ The new equilibrium market wage will be and the new equilibrium market employment level will be higher unchanged lower higher lower unchanged

Consider a market with two firms, Target and Wal-Mart, that sell CDs in their music department. Both stores must choose whether to charge a high price (S30) or a low price ($13) for the new Miley Cyrus CD. These price strategies with corresponding profits are depicted in the payoff matrix to the right. Target's profits are in red and Wal-Mart's are in blue. Target's dominant stratogy is to pick a price of $O Price = $30 Target Price = $13 $7,000 $2.500 Price = $30 $7,000 $15,000 Wal - Mart $15,000 Price $13 $5.000 $2.500 $5,000 Wal-Mart's dominant strategy is to pick a price of $_ The new equilibrium market wage will be and the new equilibrium market employment level will be higher unchanged lower higher lower unchanged

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter15: Strategic Games

Section: Chapter Questions

Problem 8MC

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Refer to the normal-form game of price competition in the payoff matrix below Firm B Low Price High Price Firm A Low Price 0, 0 50, −10 High Price −10, 50 20, 20 Suppose the game is infinitely repeated, and the interest rate is 20 percent. Both firms agree to charge a high price, provided no player has charged a low price in the past. This collusive outcome will be implemented with a trigger strategy that states that if any firm cheats, then the agreement is no longer valid, and each firm may make independent decisions. Will the trigger strategy be effective in implementing the collusive agreement? Please explain and show all necessary calculations.
Suppose two firms, Firm A and Firm B, are competing by setting quantities (Cournot competition). The two firms choose between producing 500 units or 1000 units. If the total output is 1000 units, the price is $50 per unit; if total output is 1500 units, the price is $25 per unit; if total output is 2000 units, the price is $10 per unit. Based on the information provided, fill in the firms’ revenues in the payoff matrix below with Firm A choosing the row and Firm B choosing the column.
There are two firms in an industry, Firm A and Firm B. If firm A and firm B both advertise, they each will earn $5 million in profits. If neither firm advertises, they will each earn $10 million in profits. However, if one firm advertises and the other does not, the firm that advertises will earn $15 million and the non-advertising firm will earn $1 million. List all Nash equilibrium to this game. Both firms advertise Firm A advertises and Firm B does not Firm B advertises and Firm B does not Neither firm advertises No Nash equilbrium exists
Suppose Telkomsel and Indosat are the only two firms in the internet market. They face the following payoff when the want to invest in the research budget: When both companies invest in small budget, Telkomsel will gain Rp 40 billion and Indosat will gain Rp 50 billion. When both of them invest in large budget, Telkomsel will gain Rp 20 billion and Indosat will gain Rp 30 billion. When Telkomsel invest in large budget and Indosat in small budget, Telkomsel will gain Rp 30 billion and Indosat will gain zero. When Telkomsel invest in small budget and Indosat in large budget, Telkomsel will gain zero and Indosat will gain Rp 70 billion. a). Draw the payoff matrix b). Is there a Nash Equilibrium for that case? Explain.
Consider the following entry-deterrence game. A potential entrant has two strategies, “Enter” or “Stay Out”. An incumbent firm can either Price Low or Price High, depending on whether they want to try to fight or accommodate the entrant. (The Price Low option could be a limit price, for example). Suppose if the entrant Enters and the incumbent Prices Low, both firms lose $-1M. If the entrant enters and the incumbent Prices High, each firm earns $2M. If the Entrant doesn’t enter, the incumbent earns $4M and the entrant earns $0. a)Using the concept of Nash Equilibrium, what are the predicted strategies and profits? Set up a game box or tree and explain your reasoning. b) Give an example of a different profit outcome that would lead to a different Nash Equilibrium. (From this, you can see that sometimes deterrence is effective and sometimes it isn’t, depending on the profits).
Consider a situation where two firms, 1 and 2, compete by choosing prices simultaneously. They can either compete (charge a low price) or cooperate (collude, charging a high price). The firms play this competition game repeatedly and indefinitely, using a grim trigger strategy to incentivize cooperation. They use the same interest rate, i , to discount future payoffs. Payoffs are $4,050 when both firms cooperate and $3,600 when they compete. If one firm charge a low price while the other charges a high price, the firm charging the low price gets $7,200, and the other gets zero. Which of the following statements is correct?(a) For any i < 1/7 the firms will cooperate(b) For any i > 1/8 the firms will cooperate(c) For i = 1/9 the firms will be indifferent between cooperating or competing(d) There is no way to sustain cooperation in this scenario
Alcoa and Kaiser, duopolists in the market for primary aluminum ingot, choose prices of their 500 foot rolls of sheet aluminum on the first day of the month. The following payoff table shows their monthly payoffs resulting from the pricing decisions they can make. Suppose Alcoa and Kaiser repeat their pricing decision on the first day of every month. Suppose they have been cooperating for the past few months, but now the manager at Kaiser is trying to decide whether to cheat or to continue cooperating. Kaiser’s manager believes Kaiser can get away with cheating for two months, but he also believes that Kaiser would be punished for the next two months after cheating. After punishment, Kaiser’s manager expects the two firms would return to cooperation. Kaiser’s manager ignores the time-value of money and does not discount future benefits or costs. Will Kaiser cooperate or cheat? Explain.
Alcoa and Kaiser, duopolists in the market for primary aluminum ingot, choose prices of their 500 foot rolls of sheet aluminum on the first day of the month. The following payoff table shows their monthly payoffs resulting from the pricing decisions they can make. Suppose Alcoa and Kaiser repeat their pricing decision on the first day of every month. Suppose they have been cooperating for the past few months, but now the manager at Kaiser is trying to decide whether to cheat or to continue cooperating. Kaiser’s manager believes Kaiser can get away with cheating for two months, but he also believes that Kaiser would be punished for the next two months after cheating. After punishment, Kaiser’s manager expects the two firms would return to cooperation. Kaiser’s manager ignores the time-value of money and does not discount future benefits or costs. 4. Suppose you were asked to manage a golf course that was currently charging a uniform price. Would you suggest that the course continue…
Alcoa and Kaiser, duopolists in the market for primary aluminum ingot, choose prices of their 500 foot rolls of sheet aluminum on the first day of the month. The following payoff table shows their monthly payoffs resulting from the pricing decisions they can make. Suppose Alcoa and Kaiser repeat their pricing decision on the first day of every month. Suppose they have been cooperating for the past few months, but now the manager at Kaiser is trying to decide whether to cheat or to continue cooperating. Kaiser’s manager believes Kaiser can get away with cheating for two months, but he also believes that Kaiser would be punished for the next two months after cheating. After punishment, Kaiser’s manager expects the two firms would return to cooperation. Kaiser’s manager ignores the time-value of money and does not discount future benefits or costs. What is the monthly gain to Kaiser from cheating? What is the present value of the benefit from cheating for the two months of cheating?
Alcoa and Kaiser, duopolists in the market for primary aluminum ingot, choose prices of their 500 foot rolls of sheet aluminum on the first day of the month. The following payoff table shows their monthly payoffs resulting from the pricing decisions they can make. Suppose Alcoa and Kaiser repeat their pricing decision on the first day of every month. Suppose they have been cooperating for the past few months, but now the manager at Kaiser is trying to decide whether to cheat or to continue cooperating. Kaiser’s manager believes Kaiser can get away with cheating for two months, but he also believes that Kaiser would be punished for the next two months after cheating. After punishment, Kaiser’s manager expects the two firms would return to cooperation. What is the monthly cost of punishment to Kaiser? What is the present value of the cost of cheating for the two months of punishment?
Pfizer and a competitor, Astra-Zeneca, are considering developing a new drug for a particular illness at the same time. The illness is relatively rare but the fixed cost of production is very high. In particular, the forecast demand for such a drug is insufficient to cover both firms’ costs. Analyse the interaction between the two firms using game theory. Present a payoff matrix to model the situation and analyse it for Nash equilibrium. What can either of these firms do to make their best, most- preferred outcome more likely?
Suppose that Expresso and Beantown are the only two firms that sell coffee. The following payoff matrix shows the profit (in millions of dollars) each company will earn depending on whether or not it advertises: Beantown Advertise Doesn't Advertise Expresso Advertise 8, 8 15, 2 Doesn't Advertise 2, 15 11, 11 For example, the upper right cell shows that if Expresso advertises and Beantown doesn't advertise, Expresso will make a profit of $15 million, and Beantown will make a profit of $2 million. Assume this is a simultaneous game and that Expresso and Beantown are both profit-maximizing firms. If Expresso decides to advertise, it will earn a profit of million if Beantown advertises and a profit of million if Beantown does not advertise. If Expresso decides not to advertise, it will earn a profit of million if Beantown advertises and a profit of million if Beantown does not advertise. If Beantown advertises, Expresso makes a higher profit if…