Consider whether the promises and threats made toward each other by duopolists and oligopolists are always credible (believable). Look at the figure below. Imagine that the two firms will play this game twice in sequence and that each firm publicly proclaims the following policy. Each says that if both it and the other firm choose the high price in the first game, then it will also choose the high price in the second game (as a reward to the other firm for cooperating in the first game). (Note: Profit payoffs are shown in millions of dollars.) RareAir's price strategy High Low A $12 B $15 High $12 $6 $6 D $8 Low $15 $8 a. As a first step toward thinking about whether this policy is credible, consider the situation facing both firms in the second game. If each firm bases its decision on what to do in the second game entirely on the payouts facing the firms in the second game, which strategy will each firm choose in the second game? (Click to select) b. Now move backward in time one step. Imagine that it is the start of the first game and each firm must decide what to do during the first game. Given your answer to part a, is the publicly stated policy credible? (Hint: No matter what happens in the first game, what will both firms do in the second game?) (Click to select) V c. Given your answers to parts a and b, what strategy will each firm choose in the first game? |(Click to select) Uptown's price strategy
Consider whether the promises and threats made toward each other by duopolists and oligopolists are always credible (believable). Look at the figure below. Imagine that the two firms will play this game twice in sequence and that each firm publicly proclaims the following policy. Each says that if both it and the other firm choose the high price in the first game, then it will also choose the high price in the second game (as a reward to the other firm for cooperating in the first game). (Note: Profit payoffs are shown in millions of dollars.) RareAir's price strategy High Low A $12 B $15 High $12 $6 $6 D $8 Low $15 $8 a. As a first step toward thinking about whether this policy is credible, consider the situation facing both firms in the second game. If each firm bases its decision on what to do in the second game entirely on the payouts facing the firms in the second game, which strategy will each firm choose in the second game? (Click to select) b. Now move backward in time one step. Imagine that it is the start of the first game and each firm must decide what to do during the first game. Given your answer to part a, is the publicly stated policy credible? (Hint: No matter what happens in the first game, what will both firms do in the second game?) (Click to select) V c. Given your answers to parts a and b, what strategy will each firm choose in the first game? |(Click to select) Uptown's price strategy
Chapter15: Imperfect Competition
Section: Chapter Questions
Problem 15.7P
Related questions
Question
Transcribed Image Text:Consider whether the promises and threats made toward each other by duopolists and oligopolists are always credible (believable).
Look at the figure below. Imagine that the two firms will play this game twice in sequence and that each firm publicly proclaims the
following policy. Each says that if both it and the other firm choose the high price in the first game, then it will also choose the high
price in the second game (as a reward to the other firm for cooperating in the first game). (Note: Profit payoffs are shown in millions of
dollars.)
RareAir's price strategy
High
Low
$12
$15
High
$12
$6
C
$6
$8
Low
$15
$8
a. As a first step toward thinking about whether this policy is credible, consider the situation facing both firms in the second game. If
each firm bases its decision on what to do in the second game entirely on the payouts facing the firms in the second game, which
strategy will each firm choose in the second game?
|(Click to select)
b. Now move backward in time one step. Imagine that it is the start of the first game and each firm must decide what to do during the
first game. Given your answer to part a, is the publicly stated policy credible? (Hint: No matter what happens in the first game, what will
both firms do in the second game?)
(Click to select) V
c. Given your answers to parts a and b, what strategy will each firm choose in the first game?
(Click to select)
Uptown's price strategy
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Managerial Economics: Applications, Strategies an…
Economics
ISBN:
9781305506381
Author:
James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics: Applications, Strategies an…
Economics
ISBN:
9781305506381
Author:
James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Principles of Economics 2e
Economics
ISBN:
9781947172364
Author:
Steven A. Greenlaw; David Shapiro
Publisher:
OpenStax
Principles of Economics, 7th Edition (MindTap Cou…
Economics
ISBN:
9781285165875
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning