I really need help section C of this question! suppose that Frank’s Pizza forese
ID: 1164069 • Letter: I
Question
I really need help section C of this question!
suppose that Frank’s Pizza foresees Domino’s entry and is seeking their loan for new ovens (see question 2 in your previous homework), to try and preempt this entry. Specifically, if Frank’s buys their new oven and Domino’s stays out of the market, Frank’s will make $650 million in annual profits. If Frank’s buys their new oven, and Domino’s enters, Frank’s will earn $400 million in annual profits and Domino’s will lose $50 million in annual profits. If Frank’s doesn’t buy the oven and Domino’s enters, both will earn $250 million, but if Domino’s doesn’t enter, Frank’s will earn $750 million. a. Write out this game in extensive form, and find the Nash Equilibrium, where Frank’s moves first. b. Through this preemptive strategy, can Frank’s keep Domino’s out of the market? c. How much profit does Frank’s sacrifice to keep Domino’s out of the market?
Explanation / Answer
Part C.
Normal form of the game
From this game, we can conclude that to keep Domino's out of the market, Frank's must buy new oven, because the best strategy for Dominos is not to enter in the market if Frank buys new oven, as if Domino's enter the market, it will loss $50 million while by stay out of market, if it will not gain then it also not loading anything. So to keep the Domino's out of market, Frank must buy the new oven.
And if Frank buys the new oven which means dominos will not enter in the market ( because enter will make it lose $50 million), the profit reduce to $650 million from $750 million when he do not buy new oven. So the profit that Frank sacrifice to keep Domino's out of the market is (750-650) $100 million.
Dominos Frank Enter Do not enter Buy 400, -50 650,0 Not Buy 250,250 750,0