Solved: 1 For firms with a low price guarantee the promise

of

1. For firms with a low-price guarantee, the promise of matching a lower price is a(n) ________
promise, because all firms will charge the same ________ price.
2. Suppose that Jack and Jill use a tit-for-tat scheme to encourage cartel pricing. Jill chooses
the low price for two successive months, and then switches to the high price. The two firms will
deviate from cartel pricing for a total of ________ months.
3. If two firms expect to be in the market together for a long time, the ________ (cost/benefit) of
under pricing will be large relative to the ________ (cost/benefit).
4. The practice of low-price guarantees could explain why, in the chapter opener________, paid
a lower price than ________ for an airline ticket.
5. At the beginning of this chapter, we saw that Jason paid more for his plane ticket than
Melissa did for hers, even though both people live in cities that are served by two airlines. Two
cities with the same number of airlines could have different prices if an airline in one city uses a
________ guarantee to keep prices high.
6. The marine hose case provides an example of price fixing by ________.
7. There is some evidence that________ is more effective than________ in deterring business
crime.
8. If a seller promises to refund any difference between its price and the price of its competitors,
this practice will lead to ________ (higher/lower) prices.
9. Low-Price Guarantees for a Canopy Tour. Dip and Zip provide canopy tours in a rain forest.
The average cost per rider is constant at $10. Here are the possible outcomes:
Price fixing (cartel). Each firm has 6 passengers at a price of $20.
Duopoly (no price fixing). Each firm has 8 passengers at a price of $15.
Underpricing (one firm charges $20 and the other charges $15). The low-price firm has 13
passengers and the high-price firm has 2 passengers. Dip chooses a price first, followed by Zip.
a. Assume that the firms do not provide low-price guarantees. Draw a game tree and predict the
outcome of the price-fixing game.
b. Suppose both firms provide low-price guarantees. Draw a new game tree and predict the
outcome of the price-fixing game.
c. Is the promise to match any lower price a substantive promise or an empty promise?
10. Going Out of Business Sales? Many firms have going-out-of-business sales with remarkable
bargains. What insights does the material in this chapter provide about such sales?

ANSWER
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