ps5a-1 - Industrial Organization Problem Set #5, Answers...

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Industrial Organization Problem Set #5, Answers Game Theory (1) Two competing firms are each planning to introduce a new product. Each will decide whether to produce Product A, Product B or Product C. They will make their choices at the same time. The resulting payoffs are shown below. Firm 2 A B C Firm 1: A -10, -10 0, 10 10, 20 B 10, 0 -20, -20 -5, 15 C 20, 10 15, -5 -30, -30 (a) Are there any Nash equilibria in pure strategies? If so, what are they? There are two Nash equilibria: option A&C(10,20) and C&A(20,10) (b) If both firms are pessimistic, what outcome will result? Firm 1 will chose A, Firm 2 will also chose A. Thus they will end up at (-10, -10) (c) If Firm 1 is pessimistic and Firm 2 knows that, what will Firm 2 do? Firm 1 will chose A, Firm 2 will chose C. They will end up at (10,20) (d) If both firms are optimistic, what outcome will result? The Maximax outcome is: Firm 1 à action C, Firm 2 à action C. They will end up at the worst point (-30,-30) (2) Cournot Competition Lambert-Rogers Co. is a manufacturer of petrochemical products. The firm’s research efforts have resulted in the development of a new auto fuel injection cleaner that is considerably more effective than other products on the market. Another firm, GH Squires Co., independently developed a very similar product that is as effective as the Lambert- Rogers formula. To avoid a lengthy court battle over conflicting patent claims, the two firms have decided to cross-license each other’s patents and proceed with production. It is unlikely that other petrochemical companies will be able to duplicate the product, making the market a duopoly for the foreseeable future. Lambert-Rogers estimates the demand
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ps5a-1 - Industrial Organization Problem Set #5, Answers...

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