19. You are a pricing manager at Argyle Inc.—a medium-sized firm that recently i

Question

19. You are a pricing manager at Argyle Inc.—a medium-sized firm that recently introduced a new product into the market. Argyle’s only competitor is Baker Company, which is significantly smaller than Argyle. The management of Argyle has decided to pursue a short-term strategy of maximizing this quarter’s revenues, and you are in charge of formulating a strategy that will permit the firm to do so. After talking with an employee who was recently hired from the Baker Company, you are confident that (a) Baker is constrained to charge $10 or $20 for its product, (b) Baker’s goal is to maximize this quarter’s profits, and (c) Baker’s relevant unit costs are identical to yours. You have been authorized to price the product at two possible levels ($5 or $10) and know that your relevant costs are $2 per unit. The marketing department has provided the following information about the expected number of units sold (in millions) this quarter at various prices to help you formulate your decision:

Argyle Price

Baker Price

Argyle Quantity

Baker Quantity

($)

($)

(millions of units)

(millions of units)

5

10

3

2

5

20

3

1

10

10

1

2

10

20

1

1

        Argyle and Baker currently set prices at the same time. However, Argyle can become the first-mover by spending $2 million on computer equipment that would permit it to set its price before Baker. Determine Argyle’s optimal price and whether you should invest the $2 million. (Hint: Set up a normal form game with prices being strategies and profits being payoffs.)

Argyle Price

Baker Price

Argyle Quantity

Baker Quantity

($)

($)

(millions of units)

(millions of units)

5

10

3

2

5

20

3

1

10

10

1

2

10

20

1

1

Explanation / Answer

BAKER Price $10 $20 $5 15,16 15,18 $10 10,16 10,18 The optimal price is at $ 5, considering that strategy is the dominant strategy. Argyle not invest $ 2 million because of the cost to be first mover in these conditions is not worth the payoff obtained

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