The Chain Store Paradox A monopolist (Player A) has branches in 20 different cities. He faces 20 potential competitors, one in each city. The competitors can – in sequential order – choose in or out. They do so one at a time. If a potential competitor chooses out, she receives a payoff of 1, while A receives a payoff of 5. If the competitor chooses in, she will receive a payoff of either 2 or 0, depending on the response of Player A to her action. Player A, in response to a choice of in, must choose one of two pricing strategies, cooperative or aggressive. If he chooses cooperative, both player A and the competitor receive a payoff of 2, and if A chooses aggressive, each player receives a payoff of 0. After this, the competitor in the next city will choose in or out, etc. Explain the game-theoretic solution of this game. Would you expect the given solution to happen in real life? Why or why not?

The Chain Store Paradox A monopolist (Player A) has branches in 20 different cities. He faces 20 potential competitors, one in each city. The competitors can – in sequential order – choose in or out. They do so one at a time. If a potential competitor chooses out, she receives a payoff of 1, while A receives a payoff of 5. If the competitor chooses in, she will receive a payoff of either 2 or 0, depending on the response of Player A to her action. Player A, in response to a choice of in, must choose one of two pricing strategies, cooperative or aggressive. If he chooses cooperative, both player A and the competitor receive a payoff of 2, and if A chooses aggressive, each player receives a payoff of 0. After this, the competitor in the next city will choose in or out, etc. Explain the game-theoretic solution of this game. Would you expect the given solution to happen in real life? Why or why not?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter8: Game Theory

Section: Chapter Questions

Problem 8.7P

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