Reference no: EM132401202
(a) Two firms, Alphacycle and Betterbike, have entered the bicycle sharing market. The firms are choosing how many bicycles to deploy. Each firm can deploy either 1,000 bikes or 2,000 bikes. Bicycles cost $100 per bike to deploy. Each firm's revenue will be $180 per bike if there are 2,000 bikes (in total) in the market; $150 per bike if there are 3,000 bikes in the market, and $110 per bike if there are 4,000 bikes in the market.
(i) Describe the game matrix representing the strategic choices faced by Alphacycle and Betterbike. Ensure you clearly label the strategic choices and payoffs for each player.
(ii) Analyze the game matrix and solve for the Nash Equilibrium/a. If there is no Nash Equilibrium, explain why.
(iii) Alphacycle could invest in a bicycle factory that would lower perbicycle costs from $100 to $50 (for Alphacycle only). All other aspects of the game remain the same. If Alphacycle's investment is made, what will be the Nash Equilibrium of the game, if any?
(iv) What is the maximum price Alphacycles should pay for the investment in the factory? Explain your answer.
(b) Consider the real-life bicycle sharing market. Which model - Cournot (capacity) or Stackelberg (capacity leadership)-characterizes competition in the market better, and why?
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