thank you! 3. Suppose only two firms exist in producing coffee, Dutch Bros and S
ID: 1151907 • Letter: T
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thank you!
3. Suppose only two firms exist in producing coffee, Dutch Bros and Starbucks. They are deciding whether to enter the market in Klamath Falls or not. If only one enters the market it will earn monopoly profits and pay off the other firm to keep it from entering later. If both firms enter, they engage in a price war that reduces each firms' pofts to the long-run competitive outcome of zero profits. If neither firm enters, no market exists, and profits are zero for each firm. The payoff matrix below represents this game, where the payoffs are profits in millions of dollars Starbucks Enter Don't Enter Enter 0,0 Dutch Bros Don't Enter 0,0 (a) What is the Nash equilibrium/equilibria of this game? (b) Based on your answer to a), what would you expect to happen in this industry in Klamath Falls i.e How many store do you expect to open, and who would own them)Explanation / Answer
a) Nash equilibria : In this case both firms get more than 0 profits only in two situation where one enters and the other does not . So ( enter , don;t enter ) and ( don't enter , enter ) are the best strategies they can take . Hence these both are nash equilibria . Any deviation from these fetches them 0 profits .
b) There will be monopoly in Klamath Falls . Either of the firm will enter and pay off the other one to keep it from entering the market . Either Dutch Bros or Starbucks any one will enter and own the store .
c) New nash equilibrium : ( Enter , Enter )= ( 2,2)
d) There will be duopoly . There will be two stores of both firms . Each earning profit = 2 .
e) Consumers would prefer the second situation where there is less fierce price price war since that increases consumer surplus due to lower price than monopoly and the consumers also get to choose between two varieties of coffee .
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