ASSIGNMENT 8:(A better graphic for part b. is available in the syllabus. I would
ID: 1211342 • Letter: A
Question
ASSIGNMENT 8:(A better graphic for part b. is available in the syllabus. I would encourage you to consult assignment 8 in that document.)
A. Using the Concentration Ratios of the United States Census Bureau:
B. Determine the 4 most highly concentrated retail industries in the U.S. as of 2002 based upon the 4 and then 8 largest firms.
C. Next, find the same information for Manufacturing and also included the Herfindahl-Hirschman Index.
D. In which industries among the top 5, would a merger that increased the HHI by at least 50 or more points trigger a challenge from the Justice Department? Please explain why?
The necessary information can be found at the following URL. Click on “Concentration” in the pane on the left of the page titled, Special Topics.
http://www.census.gov/econ/index.html
Why is this information important in the Five Forces model?
b. Do the participants in the following pay off matrixes have a dominant strategy? Is a Nash equilibrium present? Be sure to explain your reasoning.
In the first matrix, Doug and Amy are debating the merits of a capital improvement in their companies’ production facilities for bicycle seats; however, to take full advantage of the new production technology requires that Doug and Amy increase their respective market shares. Unfortunately, the market has not been growing much lately and if Doug increases his market share, it will likely have a negative effect on Amy’s company’s market share. The true is the same in reverse.
The second matrix is exhibits the payoffs from the effects of increased advertising by Amy’s and Doug’s companies. Doug’s company advertising has not been very effective, but he will enjoy some positive coat tail effects on the bicycle seat market as the result of increased advertising by Amy’s company.
Payoff Matrix 1
Amy’s Strategy
Abandon Capital Project
Adopt Capital Project
Doug’s Strategy
Abandon Capital Project
Amy’s Profit = $20K
Doug’s Profit = $35K
Amy’s Profit = $40K
Doug’s Profit= $45K
Adopt Capital Project
Amy’s Profit = $25K
Doug’s Profit= $60K
Amy’s Profit = $35K
Doug’s Profit= $50K
Payoff Matrix 2
Amy’s Strategy
Increased Advertising Expenditures
Unchanged Advertising Expenditures
Doug’s Strategy
Increased Advertising Expenditures
Amy’s Additional Profit
= $58K
Doug’ s Additional
Profit = $6K
Amy’s Additional Loss
= $-5K
Doug’s Additional
Profit= $8K
Unchanged Advertising Expenditures
Amy’s Additional Profit =
$60K
Doug’s Additional
Profit= $4K
Amy’s Additional Profit
= $0K
Doug’s Additional
Profit= $0K
Amy’s Strategy
Abandon Capital Project
Adopt Capital Project
Doug’s Strategy
Abandon Capital Project
Amy’s Profit = $20K
Doug’s Profit = $35K
Amy’s Profit = $40K
Doug’s Profit= $45K
Adopt Capital Project
Amy’s Profit = $25K
Doug’s Profit= $60K
Amy’s Profit = $35K
Doug’s Profit= $50K
Explanation / Answer
Dominant Strategy: It is a strategy for a player i.e. best response to all strategy profile of other player.
Payoff Matrix 1: Dominant strategy of Dough is to Adopt capital project because it will give him payoff ($60K, $50K) which is greater than the payoff from Abondon capital project i.e. ($35K, $45K).
Dominant strategy of Amy is also to Adopt capital project becaue it will provide him payoff of ($40K, $35K) which is greater than the payoff from Abondon capital project i.e. ($20K, $25K).
Payoff Matrix 2: Dominant strategy of Dough is to Increase Advertising Expenditure because it will give him payoff ($6K, $8K) which is greater than the payoff from Unchanged Advertising Expenditure i.e. ($4K, $0K).
Dominant strategy of Amy is also to Increase Advertising Expenditure becaue it will provide him payoff of ($58K, $60K) which is greater than the payoff from Unchanged Advertising Expenditure i.e. ($-5K, $0K).
NASH EQUILIBRIUM : It is a strategy profile such that for each players given strategy, it is best response. Nash equilibriu is a set of strategies such that each player is doing their best given the strategy of the other player.
Payoff Matrix 1:
If Doug chooses Adopt capital project then, best response of Amy is Adopt capital project.
If Amy chooses Adopt capital project then, best response of Doug is Adopt capital project.
So, (Adopt capital project, Adopt capital project) is the nash equilibrium.
Payoff Matrix 2:
If Doug chooses Increase Advertising Expenditure then, best response of Amy is Increase Advertising Expenditure.
If Amy chooses Increase Advertising Expenditure then, best response of Doug is Increase Advertising Expenditure.
So, (Increase Advertising Expenditure,Increase Advertising Expenditure) is the nash equilibrium.
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