ECOS2201-prelect02 - S I D E R E M E N S E A D E M M U T A...

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Unformatted text preview: S I D E R E M E N S E A D E M M U T A T O University of Sydney ECOS2201 - Lecture 2 1 Firm Strategies Value / Cost Strategies Porter introduced two main strategies into the literature- The cost strategy , produce a low quality product at low cost- The value strategy , produce a high quality product at high cost 2 In reality firms adopt the value (quality)/cost combination that maximises their profit. Does not have to be extreme. Virgin Blue - low value customers, low cost Qantas - high value customers, both business and tourist Oz Jet - high value customers 3 Business travellers need flexible flight schedules, but not enough of them to warrant frequent flights. Oz jet no longer flies. This is why Qantas caters to both Think about why Qantas and Virgin Blue have chosen different value/cost combinations 4 Quality Choice with Competition Some game theory needed A best response is the optimal action to the actions of other players. Assume two florists, Anne and Bob, sell bunches of flowers at a market and that they are homogeneous products. 5 The market demand for bunches of flowers is p = 10- . 1 Q, where p is per-unit price when Q bunches are sold in the market. Let q a + q b = Q, where q a is Annes sales. Assume the florists pay $2 for a bunch of flowers (this is their marginal cost (and average cost)). Annes profit is a = (10- . 1 q a- . 1 q b- 2) q a (1) 6 Question: Find Annes best response function ? 7 Strategies form a Nash Equilibrium if each strategy of each player is a best response to the equilibrium strategies of all other players 8 Question: Find the Nash Equilibrium of the florist game 9 A Nash Equilibrium in quantities is called a Cournot Equilibrium ....
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ECOS2201-prelect02 - S I D E R E M E N S E A D E M M U T A...

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