D the nash equilibrium occurs when each firm charges

Info icon This preview shows pages 3–4. Sign up to view the full content.

View Full Document Right Arrow Icon
( d ) The Nash equilibrium occurs when each firm charges a low price. 6. We have seen in the answer to Problem 1 c above that each firm adopts its dominant strategy of charging the low price and earns a profit of 1 (see the top left cell of the payoff matrix in Problem 1 c ). Each firm, however, would earn a profit of 2 if each charged a high price (see the bottom right cell). But that could only be achieved through cooperation. Thus, firms A and B face the prisoners' dilemma. 10. ( a ) From the payoff matrix of the problem, we see that firm A adopts its dominant strategy of charging a high price and firm B enters the market. Thus, firm A earns a profit of 4 and firm B earns a profit of 5. ( b ) The threat by firm A to lower price should not discourage firm B from entering the market because the threat is not credible. The reason is that firm A earns a profit of 3 if it charges the low price and a profit of 4 if it charges the high price. ( c ) Short of building excess capacity, firm A can make its threat credible by cultivating a reputation for aggressively fending off entry into the market by lowering price (and thus imposing a loss on the potential entrant), even if this means lower profits.
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Froeb and McCann’s chapter 15: a. Individual problems: 15-4 Airline Hub Game There are two equilibria (this is a game of chicken): Airline A Atlanta Chicago Airline B Atlanta $40M , $40M $85M , $60M Chicago $60M , $85M $35M , $35M 15-5 Auditing Game There are no pure strategy equilibrium. There is, however, a mixed strategy equilibrium. Auditor Audit Don’t Audit Manager Prepare 20 , -20 -20 , 20 Don’t Prepare -20 , 20 20 , -20
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern