MICROECONOMICS
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ISBN: 9780134519494
Author: Acemoglu
Publisher: PEARSON
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Chapter 12, Problem 3P
To determine
Author or publisher, the better off from the higher
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Price competition between firms, from the firms’ perspective, can be similar to the prisoners’ dilemma. The best outcome for all firms would be for all to charge a high price. However, if the other firms charge a high price, any individual firm has incentives to charge a low price and steal the market. Additionally, if any other firm chooses a low price, each firm should charge a low price too so that it doesn’t get priced out of the market. Explain how price-matching (firms announcing a policy where they match the lowest price a customer can find or will honor a competitor’s coupon) can help firms avoid the Nash equilibrium in which they all charge a low price. Is it misleading for a firm to advertise price-matching as being beneficial to consumers? (Hint: What outcomes of the game are ruled out by the price-matching policy? How does ruling out these outcomes change the game and the decision the firms face?)
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Auctioneers in the state of Nebraska need to get a license from the State in order to operate. Suppose the license has a one-time fee of $50,000. Once the license is granted, the state of Nebraska allows the auctioneer to sell the license to others at any price. But, if the auctioneer wants to, the auctioneer can give up his/her license AT ANY TIME and get a $40,000 refund from the state of Nebraska.
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