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0"“) CN—H) Econ 51 (Spring 2000) 46 Professor Klaus M. Schmidt 2. Choosing a Standard You are the CEO of one of two firms, A and B, that offer
“video on demand". However, before customers can use your services, they have to buy some additional equipment
for their TV sets that requires a certain technical standard. Two technical standards, X and Y, are feasible. 0 If both firms opt for standard X, then firm A will make
a profit of$ 20 million and B will make a profit of$ 10 million. o If both firms opt for standard Y, then firm A will make
a profit of $ 10 million and B will make a profit of$ 20
million. 0 If one firm opts for standard X and the other firm opts
for standard Y, then both firms will make a profit of 0. If your last name starts with a letter from A to K, then you
represent firm A. Otherwise you represent firm B. Write down your last name here: What standard would you choose? 0 standardX
O standardY QWEMMYL (565T
(Les (’MSE 9/» mo»; ‘7 Econ 51 (Spring 2000) 4—4 Professor Klaus M. Schmidt 4.2 Some Experiments 1. Choosing Prices in an Oligopoly There are two airlines that are offering flights between San
Francisco and Munich at around the same times every day.
You are the CEO of one of these airlines and you have to set the price for your flights for the next three months. You
have two options: 1. You can choose a low price 2. You can choose a high price However, your profit depends not only on your own decision,
but also on the pricing decision of your competitor: o If you choose the low price and your competitor choo—
ses the high price, then almost all passengers will fly your airline and your profit will be $ 500,000, while your
competitor gets a profit of $ 0. o If both airlines choose the low price, then about half of all passengers will fly with each airline and each airline
makes a profit of $ 100,000. 0 If you choose a high price and your competitor chooses
a low price, then almost all passengers will fly with your to We?“ Econ 51 (Spring 2000) 45 Professor Klaus M. Schmidt competitor. In this case you make a profit of $ 0 and
your competitor gets $ 500,000. 0 If both airlines choose the high price, then both airlines get roughly the same number of passengers and both
make a profit of $ 400.000 What strategy would you choose? 0 low price
0 high price ...
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 Fall '07
 Woroch

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