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23. GAME THEORY
Consider two transnational corporations that sell consumer
electronics: Mapple and Giggle. Mapple, known for its high quality and trendy
products, produces a smartphone—the iFone Next—that has become very popular
with teenagers and young adults. However, its competitor, Giggle, is
considering a few major innovations to their Lexus smartphone series (a
competing product of the iFone Next). Thus, Mapple must decide whether to
continue to set a high price on the iFone or a low price that deters Giggle
from undertaking such major innovations.
If Mapple sets a high price while Giggle does major
innovations, Mapple will make an annual profit of $6m and Giggle will make
one-third of that amount in a year. If Mapple sets a low price while Giggle
does major innovations, Mapple will make an annual profit of $3m and Giggle
will make an annual loss of $2m. If Mapple sets a high price and Giggle does
minor innovations, Mapple will make an annual profit of $10m and Giggle will
earn one-tenth of that amount in a year. If Mapple sets a low price and Giggle
does minor innovations, Mapple will make an annual profit of $6m and Giggle
will make one-sixth of that amount in a year.
Answer the following questions by making use of the above
information:
a. Create a payoff matrix to describe this scenario

b. Does either firm have a dominant strategy? (explain your
answer by using the information in your payoff matrix and providing a
definition of dominant strategy)

c. Mapple’s CEO has vaguely suggested a willingness to lower
price in order to deter Giggle from doing major innovations. Is this threat
credible in light of the payoff matrix above?

d. What actions could Mapple take to make its threat
credible? (discuss in your answer whether you think Mapple needs to make its
threat credible in the first place)

e. Does this game have a Nash Equilibrium/Equilibria?
(explain your answer by using the information in your payoff matrix and
providing a definition of Nash equilibrium)

f. In relation to the outcome in part (e), how are consumers
likely to be affected by the competition between Mapple and Giggle? Are
consumers better or worse off?

21. MARKET STRUCTURES

b. Explain and illustrate with a relevant diagram how a
corporate business can profit from price discrimination. (Be specific and use a
real-world sector in your answer)

c. what do you think would happen to an individual firm’s
ability to price discriminate if more competitors entered the market?

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