Market Structure: Oligopoly

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Week 6: Market Structure: Oligopoly - Supplemental Material Analyzing a Game: (Make sure you understand the analysis, it will help you in answering assignment #3) Suppose two competitors, Coa, Inc., and Han, Inc., are locked in a bitter pricing struggle in the aluminum industry. The following is the pricing payoff matrix (in $billion): Han Coa Pricing Strategy Limit Price Monopoly Price Limit Price $1.5 , $3 $2.5 , $2 Monopoly Price $1 , $4 $1.75 , $3 A.Is there a dominant strategy equilibrium in this problem? If so, what is it? B. Is there a Nash equilibrium in this problem? If so, what is it? ANSWERS: A. Yes, there is a dominant strategy equilibrium in this problem. Notice that if Han chooses a limit price strategy, Coa can earn $1.5 billion rather than $1 billion by also charging a limit price. If Han chooses to charge monopoly prices, Coa can earn $2.5 billion rather than $1.75 billion by charging limit prices. Irrespective of the pricing strategy chosen by Han, Coa is better off charging limit prices. Limit pricing is a dominant strategy for Coa. The same holds true for Han. If Coa chooses to charge limit prices, Han can earn $3 billion rather than $2 billion by charging limit prices. If Coa chooses to charge monopoly prices, Han can earn $4 billion rather than $3 billion by charging limit prices. Irrespective of the pricing strategy chosen by Coa, Han is better off charging limit prices. Limit pricing is a dominant strategy for Han. Because limit pricing is a dominant strategy for both players, limit pricing constitutes a dominant strategy equilibrium. B. In Nash equilibrium, neither firm can improve its own payoff through a unilateral change its own strategy. In other words, if there is a set of strategies with the property that no player can benefit by changing strategy while the other

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