5 (Table) Assume that firm A and firm B are oligopolies and both charge $20 for a product and face roughly the same costs. Firm A is considering a price decrease to $15. Profits for each firm are given in the payoff matrix (A's profits listed first, B's profits listed second) shown in the table. How will firm B react? Firm B's Price $20 Firm B's Price $15 $60,000 $120,000 $80,000 $80,000 Firm A's Price $20 Firm A's Price $15 $100,000 $100,000 $120,000 $60,000 Firm B will lower its price to $15 and earn $80,000. Firm B will keep its price at $20 and earn $100,000. Firm B will keep its price at $20 and earn $60,000. Firm B will lower its price to $15 and earn $60,000. Panel Editor

1. Consider the following game matrix. Player A Answer: Top Bottom Left a, b e, f Player B Right c, d g, h (a) If top and left are strictly dominant strategies, then what do we know the relationship of the parameters? (b) If (top, left) is a Nash equilibrium, then what do we know the relationship of the parameters? Answer: (c) If top and left are strictly dominant strategies, will (top, left) be a Nash equilibrium? Why? Answer: (d) If (top, left) is a Nash equilibrium, must the strategies be strictly dominant strategies? Why? Answer:

7) What is the significance of the mutual interdependence among the firms in an oligopolistic market?

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(REAL-WORLD APPLICATION) You are NOT required to read the oligopoly chapter in the textbook, but you already know quite a lot about it from our discussion of strategic interactions using game theory in weeks 2-3. This market structure is between monopoly and monopolistic competition, with only a handful of firms having a high degree of market power. Let's refresh your memory with the following example. Assume that the Australian low-cost airline industry consists of two firms and their situation can be represented by the following payoff matrix. Tigar Air Nothing Low Price More Advertising 0, 16 6, 6 Nothing 10, 10 2, 14 Jetstar Low Price 16, 0 12, 4 More Advertising 14, 2 4, 12 8, 8 a. Before solving the game, put yourself in the position of Jetstar and write down your action. Then independent of that, put yourself in the position of Tiger Air and write down your action. b. State all the dominated strategies in the full game, by which strategy they are dominated, and whether weakly or…

(Figure: Oligopoly Pricing Strategy in Wireless TV Market II) Use Figure: Oligopoly Pricing Strategy in Wireless TV Market II. The noncooperative equilibrium in the cable TV market occurs when: Next Wireless Supreme Wireless High price Low price High price Next Wireless earns $100,000 Supreme Wireless earns $100,000 Next Wireless earns $80,000 Supreme Wireless earns $130,000 Low price Next Wireless earns $130,000 Supreme Wireless earns $80,000 Next Wireless earns $90,000 Supreme Wireless earns $90,000 O Next Wireless sets a high price and earns $80,000, and Supreme Wireless sets a low price and earns $130,000. O both firms set a high price, and each earns $100,000. K O Next Wireless sets a low price and earns $130,000, and Supreme Wireless sets a high price and earns $80,000. O both firms set a low price, and each earns $90,000.