Question

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The two companies below are simultaneously deciding to enter the same untapped retail market and opportunities look excellent. The only issue for each is the size of the store to be built. Expected payoffs in millions of dollars are below.

                                                Big-Box                                             

                                    Small       Medium      Large                                                                                                              

               Small :          16,30       8,20           10,10  

YMart:                                                          

               Medium :       18,18       12,15         14, 8

               large   :           15,25       10,23         16, 20             

As a simultaneous play game, (for parts A and B below)

(A) (4 pts) Which, if any, of the players has a dominant strategy?

                        ANSWER: ______________________

(B) (3 pts) If any Nash equilibria exist, identify them. If they are none, so state.

                        ANSWER: ____________________

(C) (3 pts) Now suppose instead of a simultaneous play game, Big-Box, because of better planning and foresight, had the advantage of going first and turning the competition into a sequential game, if it so chooses. However, to go first and credibly go first, Big-Box has to accelerate its construction plans. Because of union overtime provisions and other costs of acceleration, Big-Box would have additional costs of $1 million dollars if it announces and begins building. If it doesn’t choose to accelerate, it has no fear that Ymart will go first because Ymart’s acceleration costs are prohibitive of that strategy.

Should Big-Box go first? Why or why not? Clearly explain your reasoning.

Answer 1