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Game Theory: Do Price-matching Offers Discourage Price Cuts?

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Please help with the following problem in around 200 words.

Company X announces that if it reduces its price subsequent to a purchase, the early customer will get a rebate so that he or she will pay no more than those buying after the price reduction.

A. If Company X has only one rival, and if its rival too makes such an announcement, does this change the payoff matrix? If so, in what way?
B. Do such announcements tend to discourage price cutting? Why or why not?

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Solution Summary

This posting helps with problems regarding managerial economics. It answers question regarding rivals and payoff matrices, and the effect of rival announcements on price cutting. This solution gives the answer and justifies it with game theory reasoning. The explanation is given in around 200 words.

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Problem: Company X announces that if it reduces its price subsequent to a purchase, the early customer will get a rebate so that he or she will pay no more than those buying after the price reduction.

A. If Company X has only one rival, and if its rival too makes such an announcement, ...

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