QUESTION 4 (25 POINTS)

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".

------------------------------------------------------------------------------------------------------------

Customer Type Product 1 Product 2

------------------------------------------------------------------------------------------------------------

1 $85 $ 120

2 240 50

3 120 140

------------------------------------------------------------------------------------------------------------

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.