3. Two firms, Skynet and Omni Consumer Products (OCP), are the only two firms in

Question

3. Two firms, Skynet and Omni Consumer Products (OCP), are the only two firms in the market for robot:s a. [2 points] Calculate the Herfindahl index for this market (use percents as whole numbers) HI = 5024 502 = 5000 The payoff matrix below describes the profits each company receives from playing one of two strategies: a high-price strategy or a low-price strategy Skvnet High price Low price High price OCP: S20 millionOCP: S5 million OCP Skynet: $20 million Skynet: $25 million Low price OCP: S25 million OCP: $10 million Skynet: $10 million Skynet: $5 million b. [2 points] What is OCP's dominant strategy? What is Skynet's dominant strategy? OCP: [circle one] high price^low priceDno dominant strategy Skynet: circle one| high pricelow priceDno dominant strateg c. [2 points] What is the Nash equilibrium (i.e., dominant-strategy equilibrium) outcome? OCP eans S 10 million and Skvnet earns S 10 million. d. [2 points] What is the cartel or collusion outcome? OCP eans S 20 million and Skvnet earns S 20 million. Now suppose that the payoff matrix is as follows Skynet High price Low price High price OCP: S20 millionOCP: S15 million OCP Skynet: $20 millionSkynet: $25 million Low price OCP: S25 millior OCP: $10 million Skynet: $10 milliorn Skynet: $15 million e. [2 points] What is OCP's dominant strategy? What is Skynet's dominant strategy? OCP: [circle onel high price/low price no dominant strate Skynet circle one| high price/ low price no dominant strate

Explanation / Answer

b) Dominant Strategy is that strategy which will give the player higher payoff whatever the strategy is performed by the rival. Here dominant strategy for OCP is low price. This is because when skymet charges high price then OCP will get higher pay off by charging low price (25>20) and when skynet is charging low price then OCP will get higher payoff by charging low price (10>5).

The dominant strategy for Skynet is also low price because he will get higher payoff whatever OCP charges.

c) In the Nash equilibrium both OCP and Skynet will play dominant strategies which is low price. So (low price, low price) is the nash equilibrium. It will give both players higher payoff given the action of their rival.

d) Cartel is a situation when both firms agree on joint agreement of charging higher price and earning maximum profits. In this case by charging high price both oCP and Skynet can earn $20 each. So (20,20) is the cartel or collusion outcome.

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