QUESTION 1

a. We looked at the "team member's dilemma" which is an example of a prisoner's dilemma in a single period game but may lead to a high effort outcome in a multi-period game.

Consider a one period game where two team members have two strategies - to give high effort or low effort. If both give high effort the payoff is $13,000 for each. If they both give low effort their payoff is $12,000 each. If one gives low effort and the other high effort, the one who gives low effort gets $18,000 and the one who gives high effort gets 4000.

1. Write out a multi period payoff matrix by using the technique used in class. Assume that one who starts with low effort continue with low effort and the others use a "tit for tat" strategy.
2. Compute a "break-even probability" of future interaction that would induce cooperation.
3. Explain what this probability means.
4. How would the payoffs look like for this probability to be close to zero?

b. What is the role of product differentiation and demand volatility in avoiding the prisoner's dilemma problem in pricing? Please refer to the article "Dynamics for price competition" to support your answer.

QUESTION 2

The reading "Pricing the surge" article discusses Uber's pricing strategy. Point out the conditions needed for price discrimination, and explain clearly how the conditions needed for price discrimination are met in this market.

QUESTION 3

Just like the insurance market, the labor market may face both adverse selection and moral hazard problems. Give an example of how adverse selection can be created in the labor market and the ways in which it can be solved.

QUESTION 4

Consider the following payoff matrix, where the payoffs are profits in thousand $.

Explanation of payoff: If Player 1 chooses Strategy A and player 2 chooses Strategy B then Player 1 gets $150,000 and Player 2 gets $140,000

Player 2

Strategy A B C

A 240, 200 150, 140 285, 230

Player 1

B 260, 210 180,220 280, 145

C 280, 250 120, 130 265, 225

1. Find the Nash equilibrium if the players make the decisions simultaneously.
2. Do either player have a dominant strategy? Is this a prisoner's dilemma problem? Explain.
3. Find the outcome if both players are risk averse and choose a maxi-min strategy. Explain.
4. Now consider the game as sequential. How much would player 2 invest to be the first mover? Explain.
5. Is there any potential for side payments? (one player offering the other to be 2^nd mover) If so, who will pay and how much? Explain.

QUESTION 5 (20 POINTS)

Market research has identified three different types of consumers based on survey data. The following schedule gives the reservation prices of these customers for the two most popular products you sell.

Assume that there is one customer per "Customer Type".

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Customer Type Product 1 Product 2

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1 $85 $ 120

2 240 50

3 120 140

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The marginal cost is $50 per product.

Compare the profits from pure bundling, mixed bundling, and selling the products separately. Note that price discrimination is not possible. Which of the strategies would you choose to maximize profits? Show all calculations and explain your answer. Point out the values of any discounts or dummy prices.