Intermediate Microeconomics, Winter 2008
Problem Set No 18
due: Monday, March 31; Tuesday, April 1
Reading:
Chaper 14, 513 514 (Repeated Games)
Solve the following problems from the book, Chapter 13: 30W, 38
Q1 (Chainstore Paradox).
A monopolist (Player A) has branches in 20
towns.
He faces 20 potential competitors in each town, who will be able to
choose IN or OUT. They do so in sequential order and one at a time.
If a
potential competitor chooses to stay OUT, he receives a payo/ of 1, while A
receives a payo/ of 5. If he chooses to go IN, he will receive a payo/ of either 2
or 0, depending on the response of Player A to his action. Player A, in response
to a choice of IN, must choose one of two pricing strategies, COOPERATIVE
or AGGRESSIVE. If he chooses COOPERATIVE, both player A and the com
petitor receive a payo/ of 2, and if A chooses Aggressive, each player receives
a payo/ of 0. Find the solution of this game using backward induction. What
do you think about the result? (Hint: If you are not sure how to approach the
question, work on the case for 2 towns by drawing the tree of the game to get
an idea.)
Q2.
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 Winter '08
 Burbidge,John
 Microeconomics, Game Theory, Candidate, Subgame perfect equilibrium, Nash equilibrium level, advertising outlay a1

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