Q1.  The following matrix shows strategies and playoffs for two firms that must decide how to price.

a. Does either firm have a dominant strategy, and if so, what is it?

b. What is the Nash equilibrium of this game?

c. Why would this be called a prisoner's dilemma game?

Q2.  The following describes the ice cream industry in summer 2003:

Given the Federal Trade Commission's approval of Nestle's acquisition of Dreyer's Grand Ice Cream Inc., two multinationals, Nestle SA and Unilever, are preparing to engage in ice cream wars.  Unilever, which controls the Good Humor, Ben & Jerry's, and Breyer's brands, holds 17 percent of the US market, while Nestle, owner of Haagen - Dazs and Drumstick brands will control a similar share after buying Dreyer's.

Ice cream has long been produced by small local dairies, given the problems with distribution.  Most Americans eat ice cream in restaurants and stores, although 80% of the consumption of the big national brands happens at home.  Both Unilever and Nestle want to move into the away - from - home market by focusing on convenience stores, gas stations, video shops, and vending machines, a strategy the rivals have already undertaken in Europe.

Five national brands - Haagen-Dazs, Nestle, Ben & Jerry's, Breyer's, and Dreyer's - are developing new products and flavors, focusing on single-serving products that carry profit margins 15 to 25 percent higher than the tubes of ice cream in the super markets.  The higher profit margin can open new distribution outlets.  Although traditional freezer space is very costly, Unilever, Nestle and Dreyer's have been pushing for logo - covered freezer cabinets in store, given the higher profit margins.

Under the FTC settlement, Nestle will be allowed to keep Dreyer's distribution network, which delivers ice cream directly to more than85 percent of US grocers.  Unilever must use middleman to deliver most of its Good Humor and Breyer's products.  Nestle can expand from Dreyer's supermarket base to cinemas and gas stations with little extra cost.  The supermarket ties may also help Nestle enter grocers' competitive prepared-food section, so that consumers can easily purchase ice cream along with their deli and hot foods.  Nestle agreed to sell number of Dreyer's secondary brands as part of the FTC approval.  However, Nestle Dreyer's will be able to sign more licensing agreement with the wider distribution network, and the combined company will be able to turn more of Nestle's candies into Dreyer's ice cream.

a. Describe how the ice cream industry fits the oligopoly model.

b. How does the government influences oligopolistic behavior?

c. Do oligopolists always compete on the basis of price?  Explain.