Problem Set 4 Due on April 3\"d at the start of class Question 1. A dramatic gam

Question

Problem Set 4 Due on April 3"d at the start of class Question 1. A dramatic game took place in the late 1980s in the U.K., in the satellite television market. The fight was between a consortium called British Satellite Broadcasting (BSB) and Sky Television, which was part of Rupert Murdoch's News Corporation. It was evident that the market would not support both firms. So each firm faced the dilemma: Cut its losses and exit, or tough it out in the hope that the other firm would soon exit. It was thus a classic "war of attrition." Through October 1990, the two players managed between them to rack up losses in excess of £ billion as they fought for control of the satellite broadcasting business. A significant moment in the battle came in July 1989, when Sky decided to switch from selling to leasing its satellite dishes to households. The move to leasing appears to have overcome at least some customer resistance to satellite TV: the rate of dish installations climbed sharply over the following months. But perhaps Sky's move, code-named Project X, was also designed to try to influence BSB's strategy in the battle. The simplified game below looks at this question. The Simplified Game: Two players, labelled A and B, are engaged in a Battle of the Sexes, as in the payoff matrix below: OUT 10 OUT 10 Zoom out Here, each player has to choose between staying in the market (the strategy IN), and exiting (the strategy OUT). If a player exits, then its payoff is 0 regardless of what the other player decides. (Any costs that the player may have incurred prior to when we are looking at the game are sunk.) The other player, if it decided to remain in the market, then makes a profit

Explanation / Answer

If A wants to lease in, the best option for player B is to lease out the dishes. This is so because all other options would have been disadvantages for B and would have caused him loss. If player B leases out, his revenue remains unaffected, so there is no impact on his business.

Player A will have a profit of $10 in this case.

Yes, there indeed is a signal sent by player A to player B. Sending signals to opponent is a good deal to create synergy in business and rule over the market environment.

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