Santa Monica’s government has grown tired of the clutter of vehicles caused by the large number of companies and has decided to give licenses to only two companies to operate within city limits. Luckily for you, Whylz was selected as one of the companies along with their competitor SCUTE. The chief economic officer at SCUTE has scheduled a call to discuss raising your prices in tandem. You know that if both Whylz and SCUTE raise their prices together, both companies’ profits will increase. However, you know that if SCUTE back out of the price increase, Whylz profit will decline, while SCUTE’s profits will increase. Similarly, if Whylz refuses to raise prices while SCUTE does, your firm will capture a larger share of the market and increase profits while SCUTE will lose profit. Should Whylz raise its price? Is there a Nash Equilibrium strategy? If so, is the Nash Equilibrium strategy the best outcome for your company? Is it the best outcome for both companies? Explain your answer. (Hint: set each firm’s current profits as a baseline. In what scenarios with profit increase? Decrease?)
Santa Monica’s government has grown tired of the clutter of vehicles caused by the large number of companies and has decided to give licenses to only two companies to operate within city limits. Luckily for you, Whylz was selected as one of the companies along with their competitor SCUTE. The chief economic officer at SCUTE has scheduled a call to discuss raising your prices in tandem. You know that if both Whylz and SCUTE raise their prices together, both companies’ profits will increase. However, you know that if SCUTE back out of the
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