Briefly explain the dilemma faced by a Duopolist. Now consider the following: Al
ID: 1213820 • Letter: B
Question
Briefly explain the dilemma faced by a Duopolist. Now consider the following: Alex and Harry each run a car livery service from Trenton to Atlantic City. Assume that low price guarantees are illegal. The average cost per passenger is constant at $20. The possible outcomes are as follows: A price fixing cartel arrangement. Both Alex and Harry have 15 passengers at a price of $50; Duopoly, no price fixing. Both have 20 passengers at a price of $40; and Underpricing where one charges $40 and the other charges $50. The low price competitor has 28 passengers and the other one has 5 passengers. Compute the profits under each scenario: Cartel pricing, duopoly pricing and underpricing. What is the dominant strategry for both Alex and Harry?Explanation / Answer
PROFIT UNDER PRICE FIXING CARTEL WILL BE 15 ( 50 - 20) = 15 * 30 = $450 PROFIT FOR EACH, ALEX AND HARRY.
IN CASE OF DUOPOLY PRICING PROFIT WILL BE 20 (40 - 20) = 20 * 20 = $400 PROFIT FOR EACH, ALEX AND HARRY.
IN CASE OF UNDERPRICING, PROFIT FOR LOW CHARGER WILL BE 28 ( 40 - 20) = 28 * 20 = $560
FOR HIGH PRICE CHARGER 5 ( 50 - 20) = 5 * 30 = $150.
A DOMINANT STRATEGY IS A STRATEGY WHERE REGARDLESS OF WHAT OTHER PLAYERS DO, A PLAYER GETS A SMALLER PAYOFF THAN SOME OTHER STRATEGY.
IN THE GAME ABOVE THE DOMINANT STRATEGY FOR BOTH OF THEM IS THE DUOPOLY PRICING WHERE BOTH OF THEM ARE GETTING SMALLER PAYOFF.