Second Writeup - C. If the two stores are not purchased by...

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Andrew Cheung 116001159 Andrew Cheung Microeconomics Professor Rubin May 4, 2008 A. What is each firm’s dominant strategy? Explain your answer. A dominant strategy is defined by a company’s best strategy regardless of other companies’ actions. In this case both companies’ dominant strategy are to expand since this would net them the most profit regardless of the other company’s decision. B. Suppose a third superstore bought both chains. What would the new owner’s best strategy be for each of its subsidiaries? Explain your answer. The new owner would have Ultimate Saver expand and Super Duper not expand because in doing so the new owner would maximize profits ($300 total).
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Unformatted text preview: C. If the two stores are not purchased by another firm but instead meet to collude, what is the most likely outcome of this meeting? Typically firms would both agree to not expand since it would increase both of their profits. But in this specific case, if Super Duper were to not Expand and Ultimate Saver were to expand they would make a net profit of $300, which they could agree to split evenly and both companies would make $150 of profit each. This would be the most likely outcome since $150 > $85 or $135 which is the profit they would make had neither of them expanded....
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