Exhibit 1: Prices and projected annual sales volumes for Sony PlayStation 3 and Microsoft Xbox 360 Elite

Exhibit 2: Sony PlayStation 3 Production Costs per unit in dollars

Exhibit 3: Microsoft Xbox 360 Elite Production Cost per unit in dollars

Requirements:

1: Given the information in Exhibits 1, 2, and 3 and assuming that collusion does not occur, would you predict that Sony and/or Microsoft will want to reduce console prices by $100? Complete the payoff matrix below to analyze this two-player simultaneous game by (1) replacing the player names with the names of the firms, (2) appropriately renaming the players? strategies, and (3) calculating the payoffs for each player in the four possible outcomes. You can assume Nintendo monitors its competitors? actions, but has no plans to change its price.1: Player 2 Strategy 1 Strategy 2 Player 1 Strategy 1 $A , $B $A , $B Strategy 2 $A , $B $A , $B

2: Assume the demand curves implied by the data in Exhibit 1 are linear. How many units of PS3 and Xbox 360 will Sony and Microsoft sell, respectively, if they both charged $399? How many units will each firm sell if they both charged $299? Use your answers to calculate the arc price elasticities of demand for Sony and Microsoft if they both initially charged $399 then both dropped their price to $299. Based on your arc price elasticity of demand calculations, would you recommend Sony to increase or decrease its price for PS3 if Sony solely wanted to increase total revenue? Would you make the same price recommendation to Microsoft if it was solely interested in increasing total revenue?

3: Assuming that Sony and Microsoft do not collude, can you think of reasons why these firms would be particularly aggressive in pricing their consoles? Be sure to discuss the concept of dominant strategies in your answer. (5 points) Answer 3: Question 4: Suppose that Sir Howard Stringer, Sony?s CEO in 2009, and Steve Ballmer, Microsoft?s CEO in 2009, communicated a mutual interest in colluding with each other. Which pair of strategies are they likely to agree on? How would this type of behavior violate antitrust laws? Other than this antitrust legal issue, why would this outcome not be a Nash equilibrium if they did not collude?

PS3 price $299 299 399 399 Xbox 299 399 299 399 PS3 projected number of units sold (millions) 11.25 11.75 8.25 8.75 Xbox projected number of units sold (millions) 11.25 7.0 12.5 8.0 Units produced (in Millions) Production Labor Materials & Parts Overhead Distribution 8.25 8.75 9.25 98 80 168 161 155 40 67 40 9.75 10.25 10.75 11.25 11.75 12.25 12.75 40 55 145 45 40 143 38 40 141 66.67 62.86 59.46 56.41 53.66 51.16 48.89 46.81 44.60 32 40 140 28 40 26 140 141 30 30 28 142 43.14 30 Per Unit Total Cost 372.67 343.86 321.46 296.41 281.66 270.16 260.89 244.81 241.90 $243.14 Units produced Millions) 7.00 7.50 8.00 8.50 Production Labor Materials & Parts 78 Distribution 180 69 50 172 62 50 167 56 50 161 9.00 9.50 Overhead 64.29 60.00 56.25 52.94 50.00 47.37 40 52 156 48 40 153 40 10.00 46 149 11.00 11.50 12.00 12.50 40 44 45.00 40.91 146 145 44 40 39.13 30 44 144 44 30 144 37.50 36.00 30 Per Unit Total Cost 372.29 351.00 335.25 309.94 298.00 288.37 280.00 270.91 258.13 255.50 254.00