Kingoffreedome

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Kingoffreedome

By | December 2012
Page 1 of 3
Topic Ten: Oligopoly and Game Theory

1.Suppose Penguin and Joker are the only two firms in the death ray market. Each firm is considering two possible pricing strategies – either P = $700 or P = $1500 – for their goods. The following payoff matrix gives the profit outcomes (in $m).

Joker

| P = $700| P = $1500|
Penguin
P = $700| 30
35
| 27
41
|
P = $1500| 35
29
| 38
39
|

(a)What price will each of the firms choose if they make their decisions independently, following a maximin strategy? Explain how you determined your answer.

(b)What is meant by the term collusion? In general, what is the incentive for firms in an oligopoly market to collude? Explain.

(c)Based on the payoffs for Penguin and Joker (shown above) and your solution in (a), could these firms benefit by colluding? Explain.

2.Suppose Alpha and Romeo are the only two firms in the automobile market. Each firm plans to put only one model onto the market. They are considering two possible choices – a standard model at P = $50,000 or a luxury model at P = $80,000. The following payoff matrix gives the profit outcomes (in $m).

Romeo

| P = $50,000| P = $80,000|
Alpha
P = $50,000 | 40
35
| 45
30
|
P = $80,000| 35
40
| 30
45
|

(a)What price will each of the firms choose if they make their decisions independently, following a maximin strategy? Explain how you determined your answer.

(b)Based on the payoffs for Alpha and Romeo (shown above) and your solution in (a), could these firms benefit by colluding? Explain.

3. Bob and Tom are two criminals who have been arrested for burglary. The police put Tom and Bob in separate cells. They offer to let Bob go free if he confesses to the crime and testifies against Tom. Bob also is told that he will serve a 15-year sentence if he remains silent while Tom confesses. If he confesses and Tom also confesses, they...