FIN 605 Week 6 Homework

FIN 605 Week 6 Homework | Assignment Help | Kogod School Of Business American University 

ASSIGNMENT(S) DUE BY THE START OF THE LIVE SESSION: 

• Homework 6 – Chapter 13

  Exercises 1, 3, 4, 5, 6 & 7

1. In many oligopolistic industries, the same firms compete over a long period of time, setting prices           and observing each other’s behavior repeatedly. Given the large number of repetitions, why don’t collusive outcomes typically result?

3.Two computer firms, A and B, are planning to market  network systems for office information management. Each firm can develop either a fast, high-quality  system (High), or a slower, low-quality system (Low). Market research indicates that the resulting profits to each firm for the alternative strategies are given by the following payoff matrix:

           Firm B

High Low

Firm A High 50, 40 60, 45

Low 55, 55 15, 20

a. If both firms make their decisions at the same time and follow maximin (low-risk) strategies, what will the outcome be?

b. Suppose that both firms try to maximize profits, but that Firm A has a head start in planning and can commit first. Now what will be the outcome? What will be the outcome if Firm B has the head start in planning and can commit first?

c. Getting a head start costs money. (You have to gear up a large engineering team.) Now consider the two-stage game in which, first, each firm decides how much money to spend to speed up its planning, and, second, it announces which product (H or L) it will produce. Which firm will spend more to speed up its planning? How much will it spend?  Should the other firm spend anything to speed up its planning? Explain.

4. Two firms are in the chocolate market. Each can choose to go for the high end of the market (high quality) orthe low end (low quality). Resulting profits are given by the following payoff matrix:

Firm 2

Low High

Firm 1 Low -20, -30 900, 600

High 100, 800 50, 50

a. What outcomes, if any, are Nash equilibria?

b. If the managers of both firms are conservative and each follows a maximin strategy, what will be the outcome?

c. What is the cooperative outcome? 

d. Which firm benefits most from the cooperative outcome? How much would that firm need to offer the other to persuade it to collude?

5. Two major networks are competing for viewer ratings in the 8:00–9:00 p.m. and 9:00–10:00 p.m. slots on a given weeknight. Each has two shows to fill these time periods and is juggling its lineup. Each can choose to put its “bigger” show first or to place it second in the 9:00–10:00 p.m. slot. The combination of decisions leads to the following “ratings points” results:

Network 2

First Second

Network 1 First 20, 30 18, 18

Second 15, 15 30, 10

a. Find the Nash equilibria for this game, assuming that both networks make their decisions at the same time.

b. If each network is risk-averse and uses a maximin strategy, what will be the resulting equilibrium? 

c. What will be the equilibrium if Network 1 makes its selection first? If Network 2 goes first?

d. Suppose the network managers meet to coordinate schedules and Network 1 promises to schedule its big show first. Is this Is this promise credible? What would be the likely outcome?

6. Two competing firms are each planning to introduce a new product. Each will decide whether to produce Product A, Product B, or Product C. They will make their choices at the same time. The resulting payoffs are shown below.

           Firm 2

A B C

Firm 1 A -10, -10 0, 10 10, 20

B 10, 0 -20, -20     -5, 15

C 20, 10 15, -5 -30, -30

a. Are there any Nash equilibria in pure strategies? If so, what are they?

b. If both firms use maximin strategies, what outcome will result?

c. If Firm 1 uses a maximin strategy and Firm 2 knows this, what will Firm 2 do?

7. We can think of U.S. and Japanese trade policies as a  prisoners’ dilemma. The two countries are consideringpolicies to open or close their import markets. The  payoff matrix is shown below.

Japan

Open Close

U.S.Open 10, 10 5, 5

Close -100, 5 1, 1

a. Assume that each country knows the payoff matrix  and believes that the other country will act in its own interest. Does either country have a dominant strategy? What will be the equilibrium policies if each country acts rationally to maximize its welfare?

b. Now assume that Japan is not certain that the United States will behave rationally. In particular,  Japan is  concerned that U.S. politicians may want to penalize Japan even if that does not maximize U.S. welfare. How might this concern affect Japan’s choice of strategy? How might this change the equilibrium?