Reference no: EM131063535

Microsoft Word - Assignment

This question puts up 4 different scenarios that two stores AllDay and SheepSkein are facing. In each scenario they are the only two shops selling to the whole market. Represent each scenario in a normal form game and indicate the Pure Strategy Nash Equilibrium(s). Explain.

1. In RemoteCity, AllDay and SheepSkein are each deciding whether to set up an online store or a physical store. If both set up an online store, each gets a profit of $35 million, if one sets up an online store while the other sets up a physical store then the online store will earn a profit of $50 million and the physical store will earn a profit of $40 million. If both set up a physical store they each get a profit of $30 million. Online store earns higher profit because it is less costly to operate.
2. The situation is slightly different in MainCity where the rental for physical store is very high. Here also AllDay and SheepSkein are each deciding whether to set up an online store or a physical store. If both set up an online store, each gets a profit of $70 million, if one sets up an online store while the other sets up a physical store then the online store will earn a profit of $50 million and the physical store will earn a profit of $20 million. If both set up a physical store they each get a profit of $15 million. Represent this in a normal form game and indicate the Nash Equilibrium(s). Explain.
3. In the small fun township of ReflectedSoundOfUndergroundSpirits the two stores realised that only small physical stores will work. Their CEOs met together and decided to specialise their merchandise so that they can work the whole market together. However, the CEOs had consumed way too many alcohols during the meeting and next morning could not quite remember whether they had decided to specialise in Liquor or Snacks. They were too ashamed to contact the other to confirm. The people of the township drink a lot and snack a lot but they want to always snack with the drinks and only drink if there are snacks to go with. If both stores specialise in liquor or in snacks, they each have a loss of $1 million (no customers, fixed cost of setting up shop wasted). If one store specialises in liquor and the other in snacks both get a profit of $2 million.
4. In the small city of Roulette there is no Internet and the only way to shop is in person. The city is so small, however, that only one shop can cater to the whole city. AllDay and SheepSkein decide to play Rock Paper Scissor to decide if they want to share the market aggressively as a Cournot duopoly or be the sole player in the market. Rock beats Scissor, Scissor beat Paper and Paper beats Rock. If one wins, he gets a monopoly profit $20 million and the other gets zero. If they draw they will share the market as a duopoly and each earn dupoly profit of $9 million.

Please typewrite your answers and draw the matrices in MSWord or similar word processing software. Writing all of the assignment by hand and scanning it in is not appreciated - you should at least type in your non-matrix parts of the answers. Save a copy of your assignment as a backup. Convert your assignment into a pdf file and upload them in the Assessments > Week 12> Online Short Answer link on LMS. You can submit only once, so go over your work thoroughly before you pdf it and upload it.