Chap011App - Chapter 11 Monopolistic Competition and...

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Chapter 11 – Monopolistic Competition and Oligopoly (Appendix) Chapter 11 Monopolistic Competition and Oligopoly (Appendix) APPENDIX QUESTIONS 1.Is the game shown by Figure 11.3 in the chapter (not this appendix) a zero-sum game or is it a positive-sum game? How can you tell? Are there dominant strategies in this game? If so, what are they? What cell represents a Nash equilibrium and why? Explain why it is so difficult for Uptown and RareAir to achieve and maintain a more favorable cell than the Nash equilibrium in this single-period pricing game. LO8 Answer: This is a positive-sum game since the sum of the payoffs for each firm is positive. Yes, the dominant strategy is for both firms to use a low price strategy. This strategy will provide the highest payoff regardless of what the other firm does. The Nash equilibrium is for both firms to play the low price strategy (low-low cell) since neither firm has an incentive to deviate from this strategy given the strategy of the competing firm. The more favorable outcome would be for both firms to collude and use the high price strategy. Both firms would earn a profit of $12 rather than $8 in this case. The problem is that both firms have an incentive to deviate from this strategy given that the other firm is playing the high price strategy. By pricing low, given the other firm is pricing high, profits increase to $15 (rather than $12 through cooperation). 2.Refer to the payoff matrix in question 8 at the end of this chapter. First, assume this is a one- time game. Explain how the $60/$57 outcome might be achieved through a credible threat. Next, assume this is a repeated game (rather than a one-time game) and that the interaction between the two firms occurs indefinitely. Why might collusion with a credible threat not be necessary to achieve the $60/$57 outcome? LO8 Answer: Either firm could threaten to flood the market to induce the other firm to choose the $40 pricing strategy. This threat is likely to be credible since both firms benefit from the $40 pricing strategy. In a repeated game setting this threat may not be necessary since the present value of cooperation may exceed the one-time gains from deviating from the $40-$40 pricing strategy. Thus, each firm may have incentive not to deviate from the $40-$40 strategy out of fear of lower profits in the future. 11A-1
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Chapter 11 – Monopolistic Competition and Oligopoly (Appendix) 3. Refer to the payoff matrix below. LO8 Assuming this is a sequential game with no collusion, what is the outcome if Firm A moves first to build a new type of commercial aircraft? Explain why first-mover strategies in the real-world are only as good as the profit projections on which they are based. How could a supposed “win”
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