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hw07_2008 (2) - UNC-Wilmington Department of Economics and...

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UNC-Wilmington ECN 321 Department of Economics and Finance Dr. Chris Dumas Homework 7 (Due December 3rd, 5pm) Simultaneous, Repeated, and Sequential Games 1) Suppose the local Wal-Mart and Target stores are trying to decide whether or not to run advertisements in the paper announcing a big pre-holiday sale. They each must inform the paper secretly a week in advance about their intentions, and they each have a contract with the paper to keep their advertisement orders secret. The local store managers see each other at the country club, and they discuss how horrible pre-holiday price discounts are for profits, and they each say that they intend to avoid pre-holiday sales this year. After the managers get back to their offices, they each sit down to decide whether or not to place an advertisement in the paper. Suppose they each come up with approximately the same assessment of their payoffs, depending on their advertisement choices, as illustrated in the payoff matrix below: Payoffs ($ millions) Target No Ad Advertise Wal Mart No Ad Advertise What will each firm choose to do? Briefly, explain why using game theory terms. 2) Suppose there are two large department stores, Gacy's and Mimbel's, each of which needs to choose a location for its one mega-store in Gotham City. Each store will choose one of four locations: Uptown, Center City, East Side, or West Side. If both companies locate in the same part of town, they will split the market, depressing profits--they will typically make more money locating in different markets. Mimbel's stylish reputation sells particularly well on the wealthy East Side. Gacy's reputation for value sells particularly well on the middle-class West Side.
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