Question

Suppose HEB can commit to selling a large quantity of output (through an HEB plus) or a small quantity of output (an HEB) in the Calallen area of Corpus Christi, on Farm-to-Market Road 624, before Walmart decides whether to rebuild its regular Walmart store there, replacing it with a Walmart Super Store. That is, HEB chooses whether to commit to a small quantity, or a large quantity, and then Walmart decides whether to rebuild to have a much larger one.

Suppose further: If HEB commits to the small quantity and if Walmart doesn’t rebuild, HEB nets $400,000 in the first year and Walmart nets $250,000 at the existing store (on Farm-to-Market Road 624). If instead Walmart does rebuild a large store on Farm-to-Market Road 624, Walmart nets $825,000 and HEB nets $200,000. If HEB commits to the HEB plus and Wal-Mart does not rebuild, HEB nets $1,700,000 and Walmart nets $100,000 at its existing store. If instead Walmart does rebuild, Walmart nets $1,350,000 and HEB nets $550,000.

What is HEB’s likely decision? Why?

What is Walmart’s likely decision? Why?

Answer 1

	HEB sells small quantity	HEB sells large quantity
Walmart decides to rebuild the store	825K,200K	1350K,550K
Walmart decides not to rebuild the store	250K,400K	100K,1700K

If if HEB sells small quantity, walmart earns more profit of $ 825K by rebuilding the store

If if HEB sells large quantity, walmart earns more profit of $ 1350K by rebuilding the store

Therefore, whatever HEB does, Walmart's will rebuild the store.

If walmart decides to rebuild the store , HEB would earns greater profits by selling large quantity

Therefore,HEB 's likely decision will be to sell large quantity and Walmart's likely decision will be to rebuild the store