Question

Question 1: 20 pts

Little Kona is a small coffee company that is considering entering a market dominated by Big Brew. Each company’s profit depends on whether Little Kona enters and whether Big Brew sets a high price or a low price. If Little Kona enters and Big Brew sets a high price, Little Kona makes $2 million and Big Brew makes $3 million. If Little Kona enters and Big Brew sets a low price, Little Kona loses $1 million and Big Brew makes $1 million. If Little Kona doesn’t enter, Little Kona makes nothing; in this case, Big Brew makes $7 million if it sets a high price and Big Brew makes $2 million if it sets a low price.

a. Draw the decision box for this game.

b. Does either player in this game have a dominant strategy?

c. Is there a Nash equilibrium? If so, what is it?

d. If the two firms could collude and agree on how to split the total profits, what outcome would they pick?

Answer 1

Solution:- \r\n Nash equilibrium: is the concept where two or more players involve in the game. Here, it is assumed that the each player know the equilibrium strategies. No participants will gain from changing his/her own strategy As per information from the above table, it is clear that if kona enter the market or does not enter the market, Big Brew wants to maintain a high price. This means, Big Brew has a dominant strategy of maintaining a high price. kona will enter the market, if the Big Brew maintains a high price and does not enter, if Big Brew maintains a low price. This means, kona does not have a dominant strategy. \r\n from the answer part (a), kona will enter the market, because Big Brew has a dominant strategy of maintaining a high price. yes there is only one Nash equilibrium. Here, kona should enter the market, because Big Brew maintains a high price. if the two