The Little Coffee Company (LC) is considering entering into the coffee-brewing business, which is dominated by...
The Little Coffee Company (LC) is considering entering into the coffee-brewing business, which is dominated by the Huge Brewing Corporation (HB). Each firm’s profit depends on whether the Little Coffee Co. enters the industry and also on whether the Huge Brewing Corp sets a high price or a low price.
If the LC enters and HB sets a high price, HB earns $3 million in profits and LC earns $2 million in profits.
If the LC enters and HB sets a low price, each of the two companies will earn $1 million in profits.
If LC does not enter and HB sets a high price, HB ears a profit of $7 million and LC’s profits would be zero.
If LC does not enter and HB sets a low price, HB ears a profit of $2 million and LC’s profits would be zero.
Questions:
1. Set this exercise in the form a Game Theory Pay-Off Matrix.
2. What is the Little Coffee Co’s dominant strategy, if it has one?
3. What is the Huge Brewing Corp’s dominant strategy, if it has one?
4. What is the Nash Equilibrium in this problem, if one exists?
Homework Answers
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