You are the manager of a firm that manufactures front and rear windshields for the automobile industry. Due to economies of scale in the industry, entry by new firms is not profitable. DaimlerChrysler has asked your company and your only rival to simultaneously submit a price quote for supplying 100,000 front and rear windshields for its new Jeep Liberty. If both you and your rival submit a low price, each firm supplies 50,000 front and rear windshields and earns a zero profit. If one firm quotes a low price and the other a high price, the low price firm supplies 100,000 front and rear windshields and earns a profit of 9 million and the high price firm supplies no windshields and loses 1 million. If both firms quote a high price, each firm supplies 50,000 front and rear windshields and earns a 7 million profit.
Determine your optimal pricing strategy if you and your rival believe that the new Jeep is a "special edition" that will be sold only for one year. Would your answer differ if you and your rival were required to resubmit price quotes year after year and if, in any given year, there was a 50 percent chance that DaimlerChryler would discontinue the Jeep Liberty? Explain.
The best pricing strategy would be to quote high price, because the profit could be as high as 7 million. This is however subject to the condition that my rival company also quotes the high price. As a manager, I would meet my counter part of the rival company and ...