Reference no: EM133125947
Consider the market for video game consoles. Suppose that you formulate a multinomial logit model using the notation found in the lecture notes.
(a) What would the j subscript correspond to in this example? Give some examples.
(b) Why is there a need for an outside good in this specific example?
(c) Explain why it is difficult to delineate a precise market in this specific case.
(d) See if you can find an own price elasticity of demand for video game consoles in the literature (i.e. find a number for this). Please cite your source. If you can't, take it to be -3 in the questions below.
From here on assume that the inside goods are the Sony PS5, the Nintendo Switch, and the Microsoft Xbox.
(e) Find the total number of video game consoles sold in the US in a specific year.
(f) Assume from here on that the market size N equals the total number of US households. Determine N and explain why this assumption isn't reasonable
(g) Assume Bertrand competition in this market, i.e. assume that firms simultaneously and independently set prices to maximize profits from video game consoles. Explain why this is an unreasonable assumption.
(h) What is the value of the Lerner index in view of your answer to 3d?
(i) Find a ballpark estimate of the number of video game consoles sold for each of the inside goods. Please cite your source. Do your
best, but it does not have to be perfect.
(j) Based on N and your answer to 3i, compute market shares.
(k) Based on your answers to 3h and 3j, compute predicted price increase percentages for the PS5 and Xbox should Sony acquire Microsoft's Xbox division using the upward pricing pressure formula and assuming that marginal costs do not change.