Advertising decision game between Coke and Pepsi

Assignment:

  1. Find the solution to the following advertising decision game between Coke and Pepsi by using the method of successive elimination of dominated strategies.

Pepsi’s Budget

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Coke’s Budget

  1. Alpha and Beta, two oligopoly rivals in a duopoly market, choose prices of their products on the first day of the month. The following payoff table shows their monthly payoffs resulting from the pricing decisions they make.

Alpha’s Price

Beta’s Price

  • Is the pricing decision facing Alpha and Beta a Prisoner’s Dilemma? Why or why not?
  • What is the cooperative outcome? What is the non-cooperative outcome?
  • Which cells represent cheating in the pricing decision? Explain.
  • If Alpha and Beta make their pricing decision just one time, will they choose the cooperative outcome? Why or why not?
  • Can Alpha make a credible threat to punish Beta with a retaliatory price cut? Can Beta also adopt a similar retaliatory price cut?
  1. The secretary general of OPEC, Ali Rodriquez, stated that it would be easier for OPEC nations to make future supply adjustments to fix oil prices that are too high, than it would be to rescue prices that are too low. Evaluate this statement.
  2. Two firms A and B produce goods A and B, respectively. The linear demands for the two goods are, respectively,

Production costs are constant but not equal:

  • Using calculus, derive the equations for best response curves.
  • Sketch a graph of the two best-response curves. Label both axes and response curves.
  • If firm A expects firm B to set its prices at $20, what is firm A’s best response? If firm B predicts firm A will price good A at $36, what is firm B’s best response?
  • What is the Nash equilibrium price and quantity for each firm?
  • How much profit does each firm earn in Nash equilibrium?
  • If firm A and firm B set prices of $22 and $35 respectively, how much profit does each firm earn? Why don’t they choose these prices then?
  1. Thomas Selling, an expert on nuclear strategy and arms control, observed in his book The Strategy of Conflict(Cambridge, MA: Harvard University Press, 1960), “The power to constrain an adversary depends upon the power to bind oneself.” Explain this statement using the concept of strategic commitment.

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