Related questions
Bombay/6 Ave. Pizza and Joey Pepperoni’s Pizza are located close to each other on Sixth Avenue
in Manhattan. There are 450 potential customers every day, and suppose that each of them is
willing to pay up to $2 for a slice of pizza. Since the two shops are selling almost identical pizza, customers always prefer to buy from the cheaper one. (If they charge the same price, then they will split the market equally.)
It is also known that each pizza shop can supply at most 600 slices of pizza every day, and the
production cost for each slice of pizza is 80 cents. Suppose that the owner of each shop takes a
short-run perspective and only wants to maximize each day’s profits, and no shops are going to
shut down in the short run.
a) What is the appropriate economic model to study price competition in this local pizza
market?
b) If you use Nash equilibrium to make a prediction, what price is each shop going to
charge? Explain your reasoning.
c) Give two possible practical means by which the two shops could earn more than
predicted in b).
d) If Bombay/6 Ave. Pizza reduces its unit production cost to 70 cents. How will your
prediction in b) change?
From now on, return to the case where both shops have the same cost of 80 cents. Suppose that
the market size has doubled and there are 900 potential customers. Suppose each existing shop’s
production capacity of 600 pizzas remains unchanged. As a result, no shops can serve the whole
market solely.
e) Is each of the following pricing strategies a NE? Justify your answer.
(i) Each shop sets a price of 80 cents; (ii) Each shop sets a price of $2.
Step by stepSolved in 2 steps
- Two firms produce identical products at zero cost, and theycompete by setting prices. If each firm charges a low price,then both firms earn profits of zero. If each firm charges ahigh price, then each firm earns profits of £30. If one firmcharges a high price and the other firm charges a low price,the firm that charges the lower price earns profits of £50, andthe firm charging the higher price earns profits of zero. (a) Which oligopoly model best describes this situation?(b) Write this game in normal form.(c) Suppose the game is infinitely repeated. Can theplayers sustain the "collusive outcome" as a Nashequilibrium if the interest rate is 50 percent? Explain. Please answer the a, b and c parts.arrow_forwardJ 4arrow_forwardE1arrow_forward
- Only typed answerarrow_forwardMacmillan Learning You notice that the prices of coffee at your local supermarket vary from week to week, causing you to buy different brands, depending on which is cheaper that week. Your friend William, by contrast, is a hardcore Peet's fan and buys only Peet's, whether the price is $5.99 per pound or $12.99 per pound. By varying coffee prices, the supermarket sells both to you, who is relatively price particular about coffee, and to William, who is relatively price and and particular about coffee. O sensitive; less; insensitive; more insensitive; more; sensitive; less sensitive; more; insensitive; less insensitive; less; sensitive; more Incorrectarrow_forward2 clothing manufacturers, LE and LL B, are deciding what price to charge for very similar field coats. Cost of producing these coats is $100. The coats are very close substitutes, so customers swarm to the seller that offers the lowest price. If both firms offer the same prices, each receives half of the customers. Assume the two firms have the choice of pricing at prices of $103, $102, or $101. The profit each firm would earn at various prices is shown in the payoff matrix below $103 ($150, $150) ($0, $200) ($0, $120) Lands' End $102 ($200, $0) ($100, $100) ($0, $120) $101. ($120, $0) ($120, $0) ($50, $50) What is the Nash equilibrium and expected profits to LLB and LE of this game? If this was a mixed strategy game in which LLB has a 25% percent chance of choosing a price of $101, a 25% chance of choosing price of $102, and a 50% chance of choosing $103, while LE has a1/3 chance of…arrow_forward
- Rawlding is a manufacturer in the oligopolistically competitive market for footballs. Two other manufacturers, Spaldon and Wilke, compete with Rawlding for football consumers. Rawlding faces the demand curve for footballs depicted on the graph. Initially, Rawlding charges $30 per football, producing and selling 7 million footballs per year. PRICE (Dollars per ball) 36 35 34 33 32 31 30 29 28 27 26 O 7 8 FOOTBALLS (Millions of balls) 9 10 G As an oligopolist, Rawlding is a price maker. If Rawlding raises the price of its football from $30 to $32 per ball, the quantity of Rawlding footballs demanded by million footballs per year. If Rawlding reduces the price of its football from $30 to $28 per ball, the quantity of by million footballs per year. (Hint: Click on the points on the graph to see their coordinates.) footballs demanded If Rawlding raises the price of its football above $30, the kinked demand curve model suggests that Spaldon and Wilke will respond by The portion of Rawlding's…arrow_forward3. Suppose that two clothing manufacturers, Lands' End and L.L. Bean, are deciding what price to charge for very similar field coats. The cost of producing these coats is $100. The coats are very close substitutes, so customers flock to the seller that offers the lowest price. If both firms offer identical prices, each receives half the customers. For simplicity, assume that the two firms have the choice of pricing at prices of $103, $102, or $101. The profit each firm would earn at various prices (Lands' Ends Profit, LL Bean's Profit) is shown in the payoff matrix below. a. LL Bean $102 $103 ($150, $103 ($0, $200) -A $150) Lands' End $102 ($200, $0) ($100, $100) $101 ($120, $0) ($120, $0) What is the Nash equilibrium and expected profits to LL Bean and Lands' End of this game? $101 ($0, $120) ($0, $120) ($50, $50) b. Suppose this is a mixed strategy game in which LL Bean has a 25% percent chance of choosing a price of $101, a 25% chance of choosing price of $102, and a 50% chance of…arrow_forwardI don't understand how the pricing is laid out, high vs. low, or how do I compare what one company would make if it were to chose one over the other?arrow_forward
- Save Answer Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies spit the market and earn $60 million each. If they both advertise, they again split the market, but profits are lower by $20 million since each company must bear the cost of advertisirlg. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $70 million while the company that does not advertise earns only $30 million. What will these two companies do if they behave as individual profit maximizers? Neither company will advertise, and PM Inc. earns $60. One company will advertise, the other will not. Brown Inc. earns $70. Both companies will advertise, and PM Inc. earns $40. Both companies will advertise, and PM Inc. earns $60.arrow_forwardsarrow_forward33arrow_forward