Pricing by monopolistic competition.
I need assistance on the following problem. I have completed the assignment; however, not sure that my answers are correct.
Game Theory. Suppose there are only two automobile companies, Ford and Chevrolet. Ford believes that Chevrolet will match any price it sets, but Chevrolet too is interested in maximizing profit. Use the following price and profit data to answer the following questions.
Fords Chevrolet's Ford's Chevrolet's Selling Selling Profits Profits
Price Price (millions)(millions)
$4,000 $ 4,000 $8 $8
$4,000 $8,000 $12 $6
$4,000 $12,000 $14 $2
$8,000 $4,000 $6 $12
$8,000 $8,000 $10 $10
$8,000 $12,000 $12 $6
$12,000 $4,000 $2 $14
$12,000 $8,000 $6 $12
$12,000 $12,000 $7 $7
a. What price will Ford charge?
b. What price will Chevrolet charge once Ford has set its price?
c. What is Ford's profit after Chevrolet's response?
d. If the two firms collaborated to maximize joint profits, what prices would they set?
e. Given your answer to part (d), how could undetected cheating on price cause the cheating firm's profit to rise?
Sonia Allen© BrainMass Inc. brainmass.com October 16, 2018, 11:21 pm ad1c9bdddf
This question is based on a simultaneous game where you are required to find the dominant strategy equilibrium. To solve it out we need to first form the payoff matrix for the game.
There are two players: Ford and Chevrolet.
Each has 3 actions: either charge $4000, or charge $8000, or charge $12000.
The payoffs are the profits for each firm.
Assuming the first item in each cell is Chevrolet's profit and the second one is Ford's we can form the following payoff matrix:
$4000 $8000 $12000
$4000 (8,8) (12,6) (14,2)
Chevrolet $8000 (6,12) (10,10) (12,6)
The example illustrates how game theory and the idea of Nash Equilibrium can be used to determine the best price that the firm can charge in face of competition, and in case the companies decide to form a cartel. It also illustrates why cartels do not usually survive.
Economics, Markets, Supply, Demand, & Cartel Pricing
Please brief the following:
The short-run market supply curve:
-Elasticity of market supply
-producer surplus in the short run
The analysis of competitive markets:
-Evaluating the gains and losses form government policies-consumer and producer surplus
-The efficiency of a competitive market
-price supports and production quotas
-Import quotas and tariffs
-The impact of a tax or subsidy
Market power: Monopoly and Monopsony
-Average revenue and marginal revenue
-The Monopolist's output decision
-A rule of thumb for pricing
-Shifts in demand
-The effect of a tax
-The Multiplant firm
-Measuring Monopoly power
-The rule of thumb for pricing
Sources of Monopoly Power:
-The Elasticity of Market Demand
-The number of Firms
-The Interaction Among Firms
The social costs of Monopoly power:
-regulation in practice
-The makings of monopolistic competition
-Equilibrium in the short run and the long run
-Monopolistic competition and economic efficiency
-Equilibrium in an Oligopolistic market
-The Cournot model
-The linear demand curve
-First Mover Advantage-stackelberg model
Competition versus Collusion: The prisoners dilemma
Implications of the prisoners dilemma for Oligopolistic pricing:
-Price Signaling and Price Leadership
-The Dominant Firm Model
Analysis of Cartel Pricing.