Little Kona is a small coffee company that is considering entering a market domi
ID: 1174416 • Letter: L
Question
Little Kona is a small coffee company that is considering entering a market dominated by Big Brew. Each company’s profit depends on whether Little Kona enters and whether Big Brew sets a high price or a low price:
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 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.
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.
Big Brew High Price Low Price Little Kona Enter $2 million, $3 million -$2 million, $1 million Don’t Enter $0, $8 million $0, $3 millionExplanation / Answer
False because only Big brew has a dominant strategy and Little Kona doesn't has dominant strategy.
Because if Kona choose to enter then , Big brew has more pay off in choosing high price. And If Kona choose not to enter , then also Big brew has more may off in choosing high price. Hence, Big brew has a dominant strategy in choosing high price.
If Big brew chooses High price then, little Kona has more pay off in choosing to enter. And if Big brew choose Low price, then Little Kona has more pay off in choosing don't enter. Hence, Little Kona doesn't have any dominant strategy.
Because Big brew has a dominant strategy in choosing high price , therefore Little kona should chooose to enter as this gives him more pay off. As a result, the Nash equilibrium is Big Brew maintains a high price and Little Kona enters.
TRUE Little Kona should not believe the threat because there is only one nash equilibrium and that is Big brew maintains a high price and Little kona enters. And it is not in Big brews interest to carry out the threat
If the two firms collude and agree on split the total profits, Then would agree that Big brew maintains a high price and Little Kona remain out of the market . They could then split a profit of $8 milllion.
Hence, Big Brew maintains a high price and Little Kona does not enter is the outcome they would pick.
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