Crazy Eddie (CE) and Newmark & Lewis (NL) are two discount retail electronic stores in a single market, and they are rational, self-interested profit-maximizing firms. Crazy Eddie’s created a trademarked promise: “We cannot be undersold. Our prices are the lowest – guaranteed.” Newmark & Lewis then promised that if you can find a lower price anywhere else it will refund your money plus an additional 25% of the difference.

 

Crazy Eddie chooses first to set a high price or a low price, Newmark & Lewis then chooses to set a high price or a low price, and then Crazy Eddie can decide if it wants to change its price in response to the price set by Newmark & Lewis. Given their guarantees, Crazy Eddie must set a low price if Newmark & Lewis sets a low price, and vice-versa

1. What is the equilibrium of the game tree above

2. what is the role of the "we-won't-be-beat" guarantees? Explain in economics terms

Set High Price Crazy Eddie Set Price Low Set Price High N & L Set Price Low N & L Set Price Low Crazy Eddie Crazy Eddie CE: $20 NL: $20 Keep Price High Lower Price CE: $120 NL: $120 CE: NL: $20 $20