Reference no: EM132438145

The Wisconsin Cheese Industry is changing. There are about 40 producers who make a low quality cheese, but the remaining 10 producers make cheese that is comparable to the standards of the best cheeses in Europe. The high quality cheese makers want to bring the entire Wisconsin cheese industry to the top of the world standards, yet this is simply not possible when people are associating their cheese with the several lower quality cheese makers that exist in Wisconsin

Assume the following

• High quality cheese sells for a higher price than low quality, but costs more to make
• There is a higher profit margin from producing high quality vs low quality
• Buyers are not fully informed of an individual cheese maker's quality Instead, they infer quality from what Wisconsin producers as a whole are making. If almost all producers make high quality cheese in Wisconsin, then any Wisconsin cheese can sell at a "high quality" price, regardless of individual quality. But if almost all producers make low quality cheese in Wisconsin, then any Wisconsin cheese will sell at a "low quality" price, regardless of individual quality.

1. Model the Wisconsin Cheese industry (for simplicity) as consisting of two cheese makers. Each has a choice of "making a lot more money in the short term" through "reckless exploitation" or producing a more costly, but much higher quality cheese. Illustrate, using ideas from game theory, why it may be in everyone's short term individual interest to produce low quality, while all might be better off if everyone be compelled to produce high quality.
2. Use a matrix with numbers, explain your numbers (the relative payoffs to each producer in each of the four outcomes), and explain the equilibrium of the non-repeated game. Use this framework to explain why it may be necessary to "get tough" with producers who will not invest in producing higher quality cheese