QUESTION
Samsung wants to avoid Whirlpool from entering the market for high-priced, front-load washing machines. Even though front-load machines are more expensive to manufacture than top-loaders, Samsung is making economic profit as the merely firm making front-loaders for upscale consumers. The following payoff table displays the annual profits (in millions of dollars) for Samsung and Whirlpool for the pricing as well as entry decisions facing the two firms.
Samsung
Whirlpool P = $500 P = $1,000
Stay out $0, $20 $0, $34
Enter -$5, $15 $17, $17
a. Can Samsung discourage Whirlpool from entering the market for front-load washing machines by intimidating to lower price to $500 if Whirlpool enters the market? Why or why not?
Presuming the manager of Samsung decides to make an investment in extra production capacity previously Whirlpool makes its entry decision. The extra capacity increases Samsung's total costs of production however lowers its marginal costs of producing extra front-load machines. The payoff table subsequently this investment in extra production capacity is shown here:
Samsung
Whirlpool P = $500 P = $1,000
Stay out $0, $16 $0, $24
Enter -$6, $14 $12, $12
b. Can Samsung deter Whirlpool from entering the lucrative market for front-load washing machines? What obligation be true about the investment in extra production capacity in order for the strategic move to be successful? Describe.
c. Concept the sequential game tree when Samsung makes the first change by deciding whether to invest in extra production capacity. Use the roll-back technique to discovery the Nash equilibrium path. How much profit does each firm earn? Hint- The game tree will have three sequential decisions- Samsung chooses first whether to invest in extra plant capacity, Whirlpool selects whether to enter and Samsung makes its pricing decision.