The managers of Alpha and Beta must make repeated advertising decisions simultan
ID: 1223397 • Letter: T
Question
The managers of Alpha and Beta must make repeated advertising decisions simultaneously at the beginning of every month. They choose either low or high levels of advertising expenditure. Use the payoff table shown below to answer the next five questions. If both firms cooperate, Alpha will choose a (high/low) level of advertising and Beta will choose a (high/low) level of advertising. If Beta decides not to cooperate, its (undiscounted) benefit from cheating for one month is. (Show work) When Alpha punishes Beta with a retaliatory adjustment in its advertising expenditures, Beta will suffer an undiscounted penalty (compared to the cooperative outcome) of $ for each month that punishment continues. (Show work) Is Alpha's threat to punish Beta with a retaliatory adjustment in advertising expenditures credible? Explain Will Beta cooperate? Explain.Explanation / Answer
a) high; high
b) charge low price
If Alpha and Beta both cooperate then they will earn a payoff of ($ 7,000; $ 3,500). But if Beta decides not to cooperate then it will charge low price without telling this to Alpha. In this case, payoff of one month will be ($ 2,000; $ 6,500)
c) Alpha will punish Beta by charging low price for every successive month and in that payoff of Alpha and Beta will be ($ 4,000; $ 2,000). Which means Beta will sacrifice $ 1,500 for every month after its non cooperation.
So, $ 1,500 is the penalty for Beta.
d) Threat of Alpha is credible. If Alpha threat Beta that it will charge low price then, Beta will react as its profit falls.
e) Yes, Beta will cooperate because loss to Beta from non cooperating is greater.
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