GAME THEORY
Consider two transnational corporations that sell consumer electronics: Mapple and Giggle. Mapple, known for its high quality and trendy products, produces a smartphone-the iFone Next-that has become very popular with teenagers and young adults. However, its competitor, Giggle, is considering a few major innovations to their Lexus smartphone series (a competing product of the iFone Next). Thus, Mapple must decide whether to continue to set a high price on the iFone or a low price that deters Giggle from undertaking such major innovations.
If Mapple sets a high price while Giggle does major innovations, Mapple will make an annual profit of $6m and Giggle will make one-third of that amount in a year. If Mapple sets a low price while Giggle does major innovations, Mapple will make an annual profit of $3m and Giggle will make an annual loss of $2m. If Mapple sets a high price and Giggle does minor innovations, Mapple will make an annual profit of $10m and Giggle will earn one-tenth of that amount in a year. If Mapple sets a low price and Giggle does minor innovations, Mapple will make an annual profit of $6m and Giggle will make one-sixth of that amount in a year.
Answer the following questions by making use of the above information:
a. Create a payoff matrix to describe this scenario
b. Does either firm have a dominant strategy? (explain your answer by using the information in your payoff matrix and providing a definition of dominant strategy)
c. Mapple's CEO has vaguely suggested a willingness to lower price in order to deter Giggle from doing major innovations. Is this threat credible in light of the payoff matrix above?
d. What actions could Mapple take to make its threat credible? (discuss in your answer whether you think Mapple needs to make its threat credible in the first place)
e. Does this game have a Nash Equilibrium/Equilibria? (explain your answer by using the information in your payoff matrix and providing a definition of Nash equilibrium)
f. In relation to the outcome in part (e), how are consumers likely to be affected by the competition between Mapple and Giggle? Are consumers better or worse off?
MARKET STRUCTURES -
a. Explain and illustrate with a relevant diagram how a corporate business can profit from price discrimination. (Be specific and use a real-world sector in your answer)
b. What do you think would happen to an individual firm's ability to price discriminate if more competitors entered the market?