Managerial Economics & Business Strategy (Mcgraw-hill Series Economics)
9th Edition
ISBN: 9781259290619
Author: Michael Baye, Jeff Prince
Publisher: McGraw-Hill Education
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Chapter 11, Problem 19PAA
To determine
The profits earn by the firm under the low
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Many home improvement retailers like Home Depot and Lowes have low-price guarantee policies. At a minimum, these guarantees promise to match a rival’s price, and some promise to beat the lowest advertised price by a given percentage.Do these types of pricing strategies result in cutthroat Bertrand competition and zero economic profits? If not, why not? If so, suggest an alternative pricing strategy that will permit these firms to earn positive economic profits.
Many home improvement retailers like Home Depot and Lowe’s have low-price guarantee policies. At a minimum, these guarantees promise to match a rival’s price, and some promise to beat the lowest advertised price by a given percentage. Do these types of pricing strategies result in cutthroat Bertrand competition and zero economic profits? If not, why not? If so, suggest an alternative pricing strategy that will permit these firms to earn positive economic profits.
Q. Three firms operate in a market with a Demand function p = 169 - 2Q. All three firms have identical Cost functions: TC = 1200 - 95q + 2q2.i) Given that the firms are able to collude, what is the equilibrium market price and output?ii) If all of the firms cheat and each increases output by two units, what would be the new equilibrium price and the impact on an individual firm’s profits?
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Managerial Economics & Business Strategy (Mcgraw-hill Series Economics)
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- Assume the inverse demand function in a market is given by P ( Q ) = 500 − Q where Q is the total industry output, that is the sum of the output of all firms in the market. There are two firms (indexed by i = 1,2) who both have a cost of producing the good given by c ( q i ) = 10 ∗ q i The two firms are competing in the Cournot manner, that is they choose their quantities simultaneously in order to maximize profits. What is the best response of firm 1 if firm 2 chooses an output level of 200? (input a whole number:) The best response function of firm 1 with respect to firm 2's quantity choice takes the form: q 1 ( q 2 ) = w ∗ ( x − y ∗ q 2 − z ) where (w,x,y,z) are parameters of the problem. Solve for this best response function and provide the product (w*x*y*z) in the next blank: What is the Nash Equilibrium quantity produced by firm 1? (round to the nearest whole number)arrow_forwardPerrier and Apollinaris. Perrier and Apollinaris are two companies that sell mineral water in Tampa, FL. Each company has a fixed cost of $5,000 per period, regardless whether they sell anything or not. The two companies are competing for the same market and each firm must choose a high price ($2 per bottle) or a low price ($1 per bottle). Here are the rules of the game: At a price of $2, 5,000 bottles can be sold for total revenue of $10,000. At a price of $1, 10,000 bottles can be sold for total revenue of $10,000. If both companies charge the same price, they split the sales evenly between them. If one company charges a higher price, the company with the lower price sells the whole amount and the company with the higher price sells nothing. Payoffs are total profits. In this case, Apollinaris has: no dominant strategy. Perrier has a dominant strategy of P=$1. a dominant strategy of P=$1. Perrier also has a dominant strategy of P=$2. a dominant strategy…arrow_forwardPerrier and Apollinaris. Perrier and Apollinaris are two companies that sell mineral water in Tampa, FL. Each company has a fixed cost of $5,000 per period, regardless whether they sell anything or not. The two companies are competing for the same market and each firm must choose a high price ($2 per bottle) or a low price ($1 per bottle). Here are the rules of the game: At a price of $2, 5,000 bottles can be sold for total revenue of $10,000. At a price of $1, 10,000 bottles can be sold for total revenue of $10,000. If both companies charge the same price, they split the sales evenly between them. If one company charges a higher price, the company with the lower price sells the whole amount and the company with the higher price sells nothing. Payoffs are total profits. In this case, the NE is(are): (P=$2, P=$1). (P=$1, P=$2). (P=$2, P=$2). (P=$1, P=$1).arrow_forward
- Review the following hypothetical scenario and answer the following question: As you are aware, we are continuing to lose customers of our residential VoIP telephone service. According to our recent marketing research report on the topic, many of our customers are dropping due to the expense of maintaining home phone service while also having wireless plans. I would like your team to consider whether we can take advantage of selective discounting to maintain higher retention. In practice, when customers call to cancel their service, we would offer them a significant discount (25 to 30 percent) off their current rate in order to retain their business. Customers would need to agree to maintain their service for at least three months in order to get the discounted price. Please put together a short response that states whether you think this plan would increase our economic profits, and whether there are any risks that we would lose money due to this plan.arrow_forwardConsider a homogeneous good industry (such as an agricultural product) with just two firms and a total market demand Q = 400−P, so the inverse demand is P = 400 − Q. Suppose both firms have a constant marginal cost equal to $100 per unit of output and a fixed cost equal to $10,000. One simple way to depict rivalry in a duopoly (2 firms) is the Cournot model. This model is reasonable in agricultural markets where firms choose production (plantings) in advance and the market price is determined later after the crop is harvested. In the Cournot model we imagine that the two firms simultaneously choose their production or quantity, and that demand (market clearing) determines the price given each firms’ quantity. (a) Suppose (hypothetically) that the second firm produces 0 units, and the first firm anticipates this, so the first firm is the only seller. How much will the first firm produce (in this case the first firm acts like a monopolist and sets output where MR = MC)? Hint: The first…arrow_forwardConsider a homogeneous good industry (such as an agricultural product) with just two firms and a total market demand Q = 400−P, so the inverse demand is P = 400 − Q. Suppose both firms have a constant marginal cost equal to $100 per unit of output and a fixed cost equal to $10,000. One simple way to depict rivalry in a duopoly (2 firms) is the Cournot model. This model is reasonable in agricultural markets where firms choose production (plantings) in advance and the market price is determined later after the crop is harvested. In the Cournot model, we imagine that the two firms simultaneously choose their production or quantity and that demand (market clearing) determines the price given each firms’ quantity. (a) Suppose (hypothetically) that the second firm produces 0 units, and the first firm anticipates this, so the first firm is the only seller. How much will the first firm produce (in this case the first firm acts as a monopolist and sets output where MR = MC)? Hint: The first…arrow_forward
- Suppose that, prior to other firms entering the market, the maker of a new smartphone (Way Cool, Inc.) earns $80 million per year. By reducing its price by 60 percent, Way Cool could discourage entry into “its” market, but doing so would cause its profits to sink to −$2 million. By pricing such that other firms would be able to enter the market, Way Cool’s profits would drop to $30 million for the indefinite future. In light of these estimates, do you think it is profitable for Way Cool to engage in limit pricing? Is any additional information needed to formulate an answer to this question? Explain.arrow_forwardSmyth Industries operated as a monopolist for the past several years, earning annual profits amounting to $50 million, which it could have maintained if Jones Incorporated did not enter the market. The result of this increased competition is lower prices and lower profits; Smyth Industries now earns $10 million annually. The managers of Smyth Industries are trying to devise a plan to drive Jones Incorporated out of the market so Smyth can regain its monopoly position (and profit). One of Smyth's managers suggests pricing its product 50 percent below marginal cost for exactly one year. The estimated impact of such a move is a loss of $1 billion. Ignoring antitrust concerns, compute the present value of Smyth Industries' profits if it could have remained a monopoly when the interest rate was 5 percent. Multiple Choice $210 million $200 million $1.05 billion $100 millionarrow_forwardIn the late 1990s, Vanguard Airlines operated as a low-cost carrier, offering low prices and limited services, out of Kansas City, Missouri. Not long after its inception, Vanguard began offering a significant number of flights based out of Midway International Airport in Chicago, Illinois, as well. When Vanguard expanded to Midway, incumbent airlines, such as Delta, quickly responded to its low fares by offering many competing flights at comparably low prices. The intense price competition ultimately caused Vanguard to exit Midway in 2000 and file for bankruptcy in 2002. At varying points in time, the airline industry has been described as a contestable market; does the example of Vanguard support or refute this characterization of the airline industry? Explainarrow_forward
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