In: Economics
1. Suppose that U.S.-based Qualcomm and European-based T-Mobile
are contemplating infrastructure investments in a developing mobile
telephone market. Qualcomm presently uses a code-division multiple
access (CDMA) technology, which almost 67 million users in the
United States utilize. In contrast, T-Mobile uses a global systems
for mobile communication (GSM) technology that has become the
standard in Europe and Asia. Each company must (simultaneously and
independently) decide which of these two technologies to introduce
in the new market. Qualcomm estimates that it will cost $1.2
billion to install its CDMA technology and $2.0 billion to install
GSM technology. T-Mobile’s projected cost of installing GSM
technology is $1.1 billion, while the cost of installing the CDMA
technology is $2.7 billion. As shown in the accompanying table,
each company’s projected revenues depend not only on the technology
it adopts, but also on that adopted by its rival:
Projected Revenues for Different Combinations of Mobile Technology
Standards (in billions)
Standards (Qualcomm-T-Mobile) | Qualcomm’s Revenues | T-Mobile’s Revenues |
CDMA-GSM | $13.5 | $9.7 |
CDMA-CDMA | $17.2 | $15.6 |
GSM-CDMA | $16.7 | $10.1 |
GSM-GSM | $15.5 | $19.8 |
Determine the Nash equilibrium/equilibria of this game. Then,
explain the economic forces that give rise to the structure of the
payoffs and any difficulties the companies might have in achieving
Nash equilibrium in the new market.
2.
While there is a degree of differentiation between major grocery chains like Albertsons and Kroger, the regular offering of sale prices by both firms for many of their products provides evidence that these firms engage in price competition. For markets where Albertsons and Kroger are the dominant grocers, this suggests that these two stores simultaneously announce one of two prices for a given product: a regular price or a sale price. Suppose that when one firm announces the sale price and the other announces the regular price for a particular product, the firm announcing the sale price attracts 1,000 extra customers to earn a profit of $5,000, compared to the $3,000 earned by the firm announcing the regular price. When both firms announce the sale price, the two firms split the market equally (each getting an extra 500 customers) to earn profits of $2,000 each. When both firms announce the regular price, each company attracts only its 1,500 loyal customers and the firms each earn $4,500 in profits.
If you were in charge of pricing at one of these firms, would you
have a clear-cut pricing strategy? If so, explain why. If not,
explain why not and propose a mechanism that might solve your
dilemma. (Hint: Unlike Walmart, neither of these two firms
guarantees “Everyday low prices.”)