Little Kona is a small coffee company that is considering entering a market domi

Question

Little Kona is a small coffee company that is considering entering a market dominated by Big Brevw Each company's profit depends on whether Little Kona enters and whether Big Brew sets a high price or a low price: Big Brew High Price Low Price Enter $2 million, $3 million-$1 million, $1 million Little Kona Don't Enter $o, $7 million $0, $2 million True or False: Both Little Kona and Big Brew have a dominant strategy in this game. True False Which of the following outcomes represent a Nash equilibrium in this case? Check all that apply. Big Brew maintains a high price and Little Kona enters Big Brew maintains a low price and Little Kona does not enter. Big Brew maintains a low price and Little Kona enters Big Brew maintains a high price and Little Kona does not enter. Big Brew threatens Little Kona by saying, "If you enter, we're going to set a low price, so you had better stay out." True or False: Little Kona should not believe the threat True False If the two firms could collude and agree on how to split the total profits, what outcome would they pick? Big Brew maintains a low price and Little Kona enters Big Brew maintains a high price and Little Kona does not enter. Big Brew maintains a high price and Little Kona enters Big Brew maintains a low price and Little Kona does not enter.

Explanation / Answer

A) false.

Kona does not have a dominant strategy, Big brew has a dominant startegy and Kona enters the market only when Big brew maintains a high price and does not enter if Big brew has a low price.

B) Big brew maintains a high price and little Kona enters

Since big brew has a dominant startegy it will have a high price.

C) True. Little Kona should not believe the threat as Big new doesn't have the interest to carry the threat. Big brew initially makes $3 million but when it lowers the price it makes only $1 million hence the threat is empty.

D) Big brew maintains a high price and little Kona doesn't enter.

The total profit split into will be $7 million.

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