Question

Afghan Saffron Exporters Vs Iranian Saffron Market:
Economists use ‘Game Theory’ as a tool to analyze economic competition, economic phenomena such as bargaining, mechanism design, auctions, voting theory; experimental economics, political economy, behavioral economics etc. Refer to below short case study and respond to listed questions using the core concept of Game theory to determine and analyses the expected outcome. “A company, say Afghan Saffron, is considering entering the Iranian’s market which is dominated by its principal rival, say Iranian Saffron. Clearly, Afghan Exporters decision to enter or not will be judged on the potential profitability of such a move. This, in turn, depends upon the way Iranian will react to such a business move by Afghan Exporters. If Iranian reacts aggressively by launching a big commercial campaign, then an entry by Afghan n Saffron Exporters will result to a loss of $2.8 million for Afghan Saffron Exporters and a loss of $2.2 million for Iranian Manufacturers. If, on the other hand, Iranian accommodates Afghan Saffron exporter’s entry, then both Afghan and Iranian will be making profits of $1 million and $1 million, respectively. Finally, if Afghan Exporter does not enter the market at all, then Iranians will be making monopoly profits of $3.5 million”.

Required:
a) What would you do if you were the CEO of Afghan Saffron Exporter and Why, Explain briefly-use any practical approach or model discussed in the class to justify your response?
b) If you were an Iranian Saffron Producer, Would you play aggressively or would you accommodate Afghan Exporters entry?
c) What about if you were Iranian Saffron Exporters CEO?

You can answer any of above 3 a, b or c follow your role

Answer 1

I would like to answer this question in the role of Iranian Saffron Producer.

In my opinion, I would not like to accommodate Afghan Exporters entry because it will result in sharing profits with them forever. Instead I would like to play aggressively by launching a big commercial campaign, which will result to a loss of $2.2 million for Iranian Manufacturers. But this is one time loss that will be suffered and Iranian Saffron Producer would succeed in creating monopoly which will generate huge profits further so altogether that will be win win situation.

Also accommodating Afghan Saffron exporter’s entry, then both Afghan and Iranian will be making profits of $1 million and $1 million, respectively i.e. the share of profits of Iranian group will be shared with Afghan group. There is a saying the money not coming to us is also money going from us. So overall that is loss situation from short term perspective as well as from long run perspective by losing monopoly.

So, I would like to vote in favour of aggressive campaigning and keeping the rivalries away from competition and enjoying huge profits through monopoly. Keeping in mind the economic competition, economic phenomena such as bargaining, mechanism design, auctions, voting theory; experimental economics, political economy, behavioral economics etc. and analyzing there favorable and unfavorable impacts on our business I will suggest aggressive campaigning.