Payoff table: Kimberly-Clark Medium RD High RD Proctor Medium RD 600, 400 300, 5
ID: 1109612 • Letter: P
Question
Payoff table:
Kimberly-Clark
Medium RD High RD
Proctor
Medium RD 600, 400 300, 550
High RD 700, 150 400, 250
Proctor and Gamble and KImberly-Clarke dominate the US diaper market with share of about 50 percent and 35 percent respectively. Both firms invest large sums in R&D to continually reduce the cost of making better performing diapers. The payoff table shows the companies' profits from different R&D strategies.
a. Identify the Nash equilibrium of the accompanying payoff table.
b. The companies have competed for decades and make R&D decisions every year. If the competition were to go on indefinitely, what strategies might the companies employ to their mutual benefit? (Communication or collusion is not possible.) Explain.
c. R&D competition is quite different from price competition. Price changes can be implemented immediately and are immediately known to the other firrm. R&D spending takes time to yield results (sometimes a blockbuster new product) and is much harder to discern by one's rival. For the repetitive competition in part (b), in what ways does R&D competition makes things more difficult for the firms to achieve mutual long-term profits?
d. In your view, why aren't there more firms competing in the diaper market?
Kimberly-Clark Medium R&D; High R&D; Procter and Gamble Medium R&D; High R&D; 300, 550 700, 150400, 250 600, 400Explanation / Answer
a.Given the pay off table of the Proctor and Kimberly -clark, Nash equilibrium startegy for both the firms is (High R and D, High R and D). As is proctor decides medium Kimberly's best move is high and when Proctor moves high, Kimberly's best response is high. Similar thing happens when kimberly moves first.
b. The companies have competed for years and if the competition goes on indefnitely, it is not at all profitable for any of the firm to change strategy therefore high R and D will stay as the best strategy for both the firm for their mutual benefit.
c. R& D investment takes time to reap benefit as it result in higher profit in future. It has risk associated with it.
d. As the Proctor and Kimberly shares almost 85% of the diaper market, they have first movers advantage which makes it unprofitable for the other firms to enter this diaper market.
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