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Game theory Exercise

Co A

Price
\$
\$
Co B
\$
\$
Company A Payoffs
Company A
\$
100
\$
90

\$
\$
\$

Cost
100 \$
90
100 \$
90

80

Share
Pa=Pb
Pa<Pb
0.3
0.55
0.65

80

0.7

Pa>Pb

Company B
100 \$
90
99,000 \$
69,000
74,750 \$
63,250

Company B Payoffs
Company A
\$
100
\$
90

\$
\$
\$

Company B
100 \$
90
81,000 \$
80,500
80,500 \$
51,750

9000

0.45

0.35

Min price
100
90

Units
9000
11500

In a small town far away from the rest of the world

Abe's electronics and Ben's electronics stores both sell DVDs. Abe would like to increase the profit he makes selling DVDs.
So,
Abe makes the following estimates for his DVD business
Profit
Market Share
Abe's price \$
100 \$
100 \$
90 \$
90
Pa>Pb
Ben's price \$
100 \$
90 \$
100 \$
90
0.3
Abe's cost
\$
80
0.7
Ben's cost
\$
80
Market size when minimum p
Abe's Profit \$
99,000 \$
69,000 \$
74,750 \$
63,250
100
Ben's Profit \$
81,000 \$
80,500 \$
80,500 \$
51,750
90
Should Abe cut his price?
A new supplier offers Abe a "volume discount" of \$75. Now what should Abe do?

ofit he makes selling DVDs.

Market Share
Pa=Pb
Pa<Pb
0.55
0.65
0.45
0.35
Market size when minimum price :
9000
11500