Consider the wireless industry (Verizon, etc . . ) and answer the following questions:
1. What are the most important dimensions (price, technology, advertising, etc.) on which these firms compete.
2. Provide an example of recentmutual interdependence(provide a link to your references). Please ensure you fully understand the meaning of mutual interdependence from the game theory section of the chapter.
(21) The X New Tab X N Netflix x McGra X Connec X M MHE RE X C Choose X New Tab X Ask a C * * Course x New Tab X + X C D A player-ui.mheducation.com/#/epub/sn_6f2b0#epubcfi(%2F6%2F396%5Bdata-uuid-c09246454eOf4b24604886e24186705%5D!%2F4%2F4%5Bdat.. Q K Apps New Tab Course Hero Q A G Oligopoly Behavior: A Game-Theory Overview LO14.2 Discuss how game theory relates to oligopoly. Oligopoly pricing behavior has the characteristics of certain games of strategy such as poker, chess, and bridge. The best way to play such a game depends on the way one's opponent plays. Players (and oligopolists) must pattern their actions according to the actions and expected reactions of rivals. The study of how people behave in strategic situations is called game theory [. A classic example of game theory is called the prisoner's dilemma, in which each of two prisoners confesses to a crime even though they might go free if neither confesses. The logic of this outcome is explained in the nearby Consider This box, which you should read now. The "confess-confess" outcome of the prisoner's dilemma is conceptually identical to the "low price-low price" outcome in the game shown in Figure 14.1 [ . In Figure 14.1( we assume that a duopoly, or two-firm oligopoly, is producing athletic shoes. Each of the two firms-let's call them RareAir and Uptown-has a choice of two pricing strategies: price high or price low. The profit each firm earns will depend on the strategy it chooses and the strategy its rival chooses. FIGURE 14.1 Profit payoff (In millions) for a two-firm oligopoly. Each firm has two possible pricing strategies. RareAir's strategies are shown in the top margin, and Uptown's in the left margin. Each lettered cell of this four-cell payoff matrix represents one combination of a RareAir strategy and an Uptown strategy and shows the profit that combination would earn for each. Assuming no collusion, the outcome of this game is Cell D, with both parties using low-price strategies and earning $8 million of profits. RareAir's price strategy High Low\fC Refer To 1 X 3 CH10.tst x Q Eco exam x Q macroecc x New Tab x Q Chapter 2 x Q chapter 3 x _> McGraw- X Connect X M MHE Rea X + X C D A player-ui.mheducation.com/#/epub/sn_6f2b0#epubcfi(%2F6%2F396%5Bdata-uuid-c09246454eOf4624604886e24186705%5D!%2F4%2F12%5Bda... Q K : Apps New Tab Course Hero Q A FIGURE 14.1 Profit payoff (In millions) for a two-firm oligopoly. Each firm has two possible pricing strategies. RareAir's strategies are shown in the top margin, and Uptown's in the left margin. Each lettered cell of this four-cell payoff matrix represents one combination of a RareAir strategy and an Uptown strategy and shows the profit that combination would earn for each. Assuming no collusion, the outcome of this game is Cell D, with both parties using low-price strategies and earning $8 million of profits. RareAir's price strategy High Low A $12 B $15 Uptown's price strategy High $12 $6 $6 Low $15 $8 There are four possible combinations of strategies for the two firms, and a lettered cell in Figure 14.1 { represents each combination. For example, cell C represents a low-price strategy for Uptown along with a high-price strategy for RareAir. Figure 14.1 { is called a payoff matrix because each cell shows the payoff (profit) to each firm that would result from each combination of strategies. Cell C shows that if Uptown adopts a low-price strategy and RareAir a high-price strategy, then Uptown will earn $15 million (yellow portion) and RareAir will earn $6 million (blue portion). Page 271
