OLIGOPOLY:

Consider a mid-size town with 2 cardiology practices (Practice I and Practice II).

The latest technology for stress tests has just come out and costs $100,000/year to rent and service.Both practices are trying to expand their business by demonstrating that they are on the cutting edge of new technology.There is demand in the town for use of this technology that would generate additional revenue of $150,000/year.

Consider the logical results:

If both practices rent the technology each ends up with half the new business.

If only one practice rents the technology it ends up with all the new business.In addition the practice that did not rent the technology loses $50,000 of current business to the practice with the new technology due to patient preference (even though they do need the new technology now).

If neither practice rents the technology then neither generates new business.

1.Suppose that Practice I rents the technology.What will be the rational move for Practice II?

2.Suppose that Practice I makes an initial decision not to rent the technology.What will be the rational thing for practice II to do?

3.Now let's assume that these decisions are made at the same time, without the two practices being able to talk.Fill in the "Payoff Matrix" below with each practice's profits:

Practice II Rents Does Not Rent. Practice I Practice II Practice I Practice II Rents Practice I Practice I Practice II Practice I Practice li Does Not Rent