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Consider a buyer who, in the upcoming month, will make a decision about whether to purchase a good from a
The buyer’s payoff (
a) What are the Nash equilibrium strategies for the buyer and seller in this game under the assumption that it is played just once?
b) Let’s again suppose that the game is played just once (i.e., the buyer makes at most one purchase). But suppose that before the game is played, the seller can commit to offering a warranty that gives the buyer a monetary payment W in the event that he buys the product and is unhappy with the product he purchases. What is the smallest value of W such that the seller chooses to offer a high-quality product and the buyer chooses to purchase?
c) Instead of the warranty, let’s now allow for the possibility of repeat purchases by the buyer. In particular, suppose
that if the buyer purchases the product and learns that he has bought a high-quality good, he will return the next month and buy again. Indeed, he will continue to purchase, month after month (potentially forever!), as long as the quality of the product he purchased in the previous month is high. However, if the buyer is ever unpleasantly surprised—that is, if the seller sells him a low-quality good in a particular month—he will refuse to purchase from the seller forever after. Suppose that the seller knows that the buyer is going to behave in this fashion. Further, let’s imagine that the seller evaluates profits in the following way: a stream of payoffs of $1 starting next month and received in every month thereafter has exactly the same value as a one-time payoff of $50 received immediately this month. Will the seller offer a low-quality good or a high-quality good
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- help mearrow_forwardYou are an executive for Super Computer, Inc. (SC), which rents out super computers. SC receives a fixed rental payment per time period in exchange for the right to unlimited computing at a rate of P cents per second. SC has two types of potential customers of equal number-10 businesses and 10 academic institutions. Each business customer has the demand function Q = 10 - P, where Q is in millions of seconds per month; each academic institution has the demand Q = 8-P. The marginal cost to SC of additional computing is 2 cents per second, regardless of volume. a. Suppose that you could separate business and academic customers. What rental fee and usage fee would you charge each group? What would be your profits? b. Suppose you were unable to keep the two types of customers separate and charged a zero rental fee. What usage fee would maximize your profits? What would be your profits? c. Suppose you set up one two-part tariff-that is, you set one rental and one usage fee that both business…arrow_forwardA city in a developing country does not have a provider of water and sanitation services, leading to poor health outcomes for its citizens. A firm is considering entering that market. The cost curve is C(q) = 10+2q, and the inverse demand is P(q) = 10—q. The government of that city knows that, because of the high fixed cost to operate in this market, any entrant is likely to become a monopolist. Thus, they decide to implement the following regulation: the firm is not allowed to choose a price above an upper limit of p (which the government chooses and sets in the law before the firm decides to enter). There will be no transfers between the government and the firm. Assume that the firm only enters the market if it can get profits of at least zero, given the government's choice of p. Suppose that the government's goal is to maximize consumer surplus. Which of the following statements is the most correct? (a) The government needs to set p = 2, because it's the marginal cost. That…arrow_forward
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