Consider a small town that is served by two grocery stores, White and Gray. Each
ID: 1214152 • Letter: C
Question
Consider a small town that is served by two grocery stores, White and Gray. Each store must decide whether it will remain open on Sundays or whether it will close on that day. If both stores decide to close, then each has monthly profits of $21,000. However, if one is open and the other is closed, the open one has profits of $25,000 and the closed one has profits of $17,000. If both remain open on Sundays, then each has profits of $20,000. a) Why might profits be lower if both are open on Sundays than if both are closed on Sundays? b) Place payouts in the appropriate cells of the payoff matrix shown below. c) Does either firm have a dominate strategy? Is there a dominant strategy equilibrium? Is this strategy join profit maximizing? d) Is the equilibrium discussed in part c likely to be stable over time? In particular, what might firms do to alter this outcome? e) Is this an example of a prisoners’ dilemma?
Explanation / Answer
Every firm has some fixed costs and some variable costs if they open at sunday then they have to bear the cost like electricity bill, labour charge etc. but if they end up by closing at sunday then they donot need to pay all the costs at least the variable costs. Might be profit from opening shop is not as higher as the cost they have to incur so profit of opening shop is much lower than closing shop. On the other hand if one open and other remain close then the shop which is opened will get all the market share and get higher profit.
c) Here regardless of others action each player has higher payoff by opening shop. So for both of them opening the shop is domonat strategy.
Dominant strategy equlibrium is (Open,Open)
Yes here they can maximize profit jointly by choosing not to open the shop.
d) Yes this is a stable equilibrium untill they discuss with each other and end up by closing shop at saturday.
e) Here they can maximize profit jointly but they are competiting and ending with relatively lower profit so this is an example of prisoner's dilemma.
Close Open Close 21000,21000 17000,25000 Open 25000,17000 20000,20000