Economics: Industrial Economics Question Consider the following sequential game between firm 1 and firm 2: First, firm 1 decides to either adopt an aggressive marketing strategy or not. Second, Firm 2 observes firm 1's decision and then also decides between its own aggressive strategy, a passive strategy or whether to leave the market altogether. The profits (in millions of dollars) of the firms are as follows: If both adopt an aggressive strategy, then firm 1's payoff is $14 and firm 2's is $1. If firm 1 adopts an aggressive strategy and firm 2 does not, then the payoff for firm 1 is $21 and for firm 2 is -$5. If firm 1 does nothing and firm 2 adopts an aggressive strategy, firm 1's payoff is $10 and firm 2's is $9. If both do nothing, then firm 1 makes $20 in profits and firm 2 makes $5. Finally, if firm 2 leaves the market altogether, it makes $0 and firm 1 makes $20 with an aggressive strategy and $24 without one. 1. Using the principle of backward induction, the most reasonable prediction is that Choices: A. Both firms adopt an aggressive strategy. B. Firm 1 adopts a passive strategy and firm 2 an aggressive strategy. C. Firm 1 adopts a passive strategy and firm 2 exits the market. D. Firm 1 adopts an aggressive strategy and firm 2 exits the market. Guess: Firm 1 adopts an aggressive strategy and firm 2 exits the market. Now assume that Firm 2 has the chance of preempting Firm 1's move. That is, firm 2 has the opportunity to publicly commit to its strategy (of being aggressive, passive or leaving) before firm 1 decides what to do. 2. Then firm 2 should Choices: A. Pre-empt firm one by committing to a passive strategy (resulting in positive profits) B. Not care whether to pre-empt firm 1 or not since the outcome will be to leave the market. C. Pre-empt firm one by committing to an aggressive strategy (resulting in positive profits) D. Not pre-empt firm one and wait to see what it does (resulting in positive profits) Guess: The best option for firm 2 is to pre-empt firm one by committing to a passive strategy (resulting in positive profits).

Economics: Industrial Economics Question Consider the following sequential game between firm 1 and firm 2: First, firm 1 decides to either adopt an aggressive marketing strategy or not. Second, Firm 2 observes firm 1's decision and then also decides between its own aggressive strategy, a passive strategy or whether to leave the market altogether. The profits (in millions of dollars) of the firms are as follows: If both adopt an aggressive strategy, then firm 1's payoff is $14 and firm 2's is $1. If firm 1 adopts an aggressive strategy and firm 2 does not, then the payoff for firm 1 is $21 and for firm 2 is -$5. If firm 1 does nothing and firm 2 adopts an aggressive strategy, firm 1's payoff is $10 and firm 2's is $9. If both do nothing, then firm 1 makes $20 in profits and firm 2 makes $5. Finally, if firm 2 leaves the market altogether, it makes $0 and firm 1 makes $20 with an aggressive strategy and $24 without one. 1. Using the principle of backward induction, the most reasonable prediction is that Choices: A. Both firms adopt an aggressive strategy. B. Firm 1 adopts a passive strategy and firm 2 an aggressive strategy. C. Firm 1 adopts a passive strategy and firm 2 exits the market. D. Firm 1 adopts an aggressive strategy and firm 2 exits the market. Guess: Firm 1 adopts an aggressive strategy and firm 2 exits the market. Now assume that Firm 2 has the chance of preempting Firm 1's move. That is, firm 2 has the opportunity to publicly commit to its strategy (of being aggressive, passive or leaving) before firm 1 decides what to do. 2. Then firm 2 should Choices: A. Pre-empt firm one by committing to a passive strategy (resulting in positive profits) B. Not care whether to pre-empt firm 1 or not since the outcome will be to leave the market. C. Pre-empt firm one by committing to an aggressive strategy (resulting in positive profits) D. Not pre-empt firm one and wait to see what it does (resulting in positive profits) Guess: The best option for firm 2 is to pre-empt firm one by committing to a passive strategy (resulting in positive profits).

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter17: Oligopoly

Section: Chapter Questions

Problem 9PA

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