The following matrix shows strategies and payoffs for two firms that must decide how to price.
Firm 2 Price High Price Low Firm 1 Price high 400, 400 -50, 700 Price Low 700,-50 100, 100
Entrant Enter Don't enter Monopolist Price High 20, 10 50, 0 Price Low 5, -10 10, 0
A) Is the monopolistâs threat to charge a low price credible? That is, if the entrant has come in, would it make sense for the monopolist to charge a low price? Explain.
b. What is the Nash equilibrium of this game?
c. How could the monopolist make the threat to fight credible?
The following matrix shows strategies and payoffs for two firms that must decide how to price.
| Firm 2 | |||
| Price High | Price Low | ||
| Firm 1 | Price high | 400, 400 | -50, 700 |
| Price Low | 700,-50 | 100, 100 | |
| Entrant | |||
| Enter | Don't enter | ||
| Monopolist | Price High | 20, 10 | 50, 0 |
| Price Low | 5, -10 | 10, 0 | |
A) Is the monopolistâs threat to charge a low price credible? That is, if the entrant has come in, would it make sense for the monopolist to charge a low price? Explain.
b. What is the Nash equilibrium of this game?
c. How could the monopolist make the threat to fight credible?
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Related questions
Little Kona is a small coffee company that is considering entering a market dominated by Big Brew. Each company's profit depends on whether Little Kona enters and whether Big Brew sets a high price or a low price:
| Big Brew | |||
| High Price | Low Price | ||
| Little Kona | Enter | $2 million, $3 million | -$2 million, $1 million |
| Don't Enter | $0, $8 million | $0, $3 million | |
True or False: Both Little Kona and Big Brew have a dominant strategy in this game.
Which of the following outcomes represents a Nash equilibrium in this case? Check all that apply.
Big Brew maintains a low price and Little Kona enters.
Big Brew maintains a high price and Little Kona does not enter.
Big Brew maintains a high price and Little Kona enters.
Big Brew maintains a low price and Little Kona does not enter.
Big Brew threatens Little Kona by saying, 'If you enter, we're going to set a low price, so you had better stay out.'
True or False: Little Kona should not believe the threat.
If the two firms could collude and agree on how to split the total profits, what outcome would they pick?
Big Brew maintains a low price and Little Kona enters.
Big Brew maintains a high price and Little Kona does not enter.
Big Brew maintains a high price and Little Kona enters.
Big Brew maintains a low price and Little Kona does not enter.
