Business Economics

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ECM002 Business Economics

Instructions: Please answer four out of the following six following questions:

Question 1. Suppose Cola- Sol and Miniranda are the only two companies producing a particular type of cola drink in the soft drink industry. Both companies are considering launching a new drink with a light lemon twist. They can launch their products either at a low price or at a high price. The expected net payoffs are the following: If both companies choose a high price strategy, Cola- Sol will get €1200,000 and Miniranda €1200,000. If both companies decide to carry out a low price strategy Cola- Sol will get €1600,000 and Miniranda €1400,000. If Cola- Sol chooses a high price strategy and Miniranda low , Cola- Sol will get €1300,000 and Miniranda €1500,000. If Cola- Sol goes for a low price and Miniranda for high, Cola- Sol will get €1500,000 and Miniranda €1200,000.

a) Suppose the two companies reach a decision simultaneously. Display the information provided above in a strategic form.

|Cola Sol high |Cola Sol low | |1200000 |1500000 | | | | |Miniranda high |Miniranda high | |1200000 |1200000 | |Cola Sol high |Cola Sol low | |1300000 |1600000 | | | | |Miniranda low | | |1500000 |Miniranda low | | |1400000 |

Correct display of strategic form is expected……………….20 b) Find the Nash equilibrium and explain its meaning. Describe the technique used for finding Nash equilibria. Nash equilibrium: For both companies to bid low. Reached through choosing the highest payoff given the actions of the competitor………………………………………………….20 Arrow technique: Comparison of alternative strategies on the strategic form. Arrow will point towards the highest payoff. Nash equilibrium: square in strategic form towards which two arrows are pointing……………………………20 c) Is there a dominant strategy? If so, what are its implications? (There can be more than one dominant strategies).

Two dominant strategies: for both companies to bid low. Companies will follow those strategies regardless of the actions of their competitors……………………………….20 d) Suppose decisions are made sequentially, and Cola-Sol makes the first move by choosing a low price strategy. Display the information in an extensive form.

C:1200000, M:1200000 high

Miniranda
high
low C:1300000, M:1500000 Cola sol
high C:1500000, M:1300000 low Miniranda

low...
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