Game Theory This question concerns the market for video game systems in 2009, focusing on two

of the major players, Sony with its PS3 and Microsoft with its Xbox. Both had been engaging in a series of price cuts in 2007 and 2008 in a bid to gain market share. The price levels reached in 2008 held steady for a year. But by August 2009, as the holiday season approached and with the economy still mired in a major recession, gaming blog speculators and analysts at the Wall Street Journal debated whether one or both companies would cut prices in the near future and what that would mean for resulting sales levels. Table 5.1 summarizes their expectations about likely sales levels for different pricing scenarios. Tables 5.2 and 5.3 present the cost schedules for Sony and Microsoft at various levels of output. Note: The "overhead" expenses in these exhibits represent the allocation of management and other fixed costs to the console division in each company. Treat these as fixed costs for your calculations. All other costs are variable.

Table 5.1: Sales Projections PS3 Price Xbox 360 Price PS3 Projected Xbox 360 Units Sold (in Projected Units Millions) Sold (in Millions) $299 $299 11.25 11.5 $299 $399 11.75 7.0 $399 $299 8.25 12.5 $399 $399 8.75 8.0Table 5.2: Cost Schedule for Sony P53 Units Produced (in millions) Labour Materials Overhead 40 Table 5.3: Cost Schedule for Microsoft Xbox 360 Units Produced 7 OO 11.5 12.5 (in millions) Labour 78 62 44 44 Materials 180 167 145 144 Overhead 64.29 56.25 39.13 36 Distribution 50 50 30 30