Chapter 14: Problem 2
How are decision trees used to analyze sequential games?
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Chapter 14: Problem 2
How are decision trees used to analyze sequential games?
These are the key concepts you need to understand to accurately answer the question.
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Suppose there are four large manufacturers of toilet tissue. The largest of these manufacturers announces that it will raise its prices by 15 percent due to higher paper costs. Within three days, the other three large toilet tissue manufacturers announce similar price hikes. Would this decision to raise prices be evidence of explicit collusion among the four companies? Briefly explain.
Bob and Tom are two criminals who have been arrested for burglary. The police put Bob and Tom in separate cells. They offer to let Bob go free if he confesses to the crime and testifies against Tom. Bob also is told that he will serve a 15 -year prison sentence if he remains silent while Tom confesses. If Bob confesses and Tom also confesses, they will each serve a 10-year sentence. Separately, the police make the same offer to Tom. Assume that Bob and Tom know that if they both remain silent, the police have only enough evidence to convict them of a lesser crime, and they will both serve 3 -year sentences. a. Use the information provided to write a payoff matrix for Bob and Tom. b. Does Bob have a dominant strategy? If so, what is it? c. Does Tom have a dominant strategy? If so, what is it? d. What prison sentences do Bob and Tom serve? How might they have avoided this outcome?
Give an example of a government-imposed barrier to entry. Why would a government be willing to erect barriers to firms entering an industry?
Movie studios split ticket revenues with the owners of the movie theaters that show their films. When a movie is no longer being shown in theaters, theater owners earn nothing further from the film, but studios continue to earn revenue when the movie is available for home viewing on DVD, Blu-ray, streaming, and cable. Theater owners would prefer that the time between when a movie appears in theaters and when it becomes available for home viewing be as long as possible. Typically, movies are not available for home viewing for at least 90 days after they are first shown in theaters. An article in the Wall Street Journal in 2017 noted a possible change to this system: "Hollywood studios are preparing to upend decades of tradition by releasing movies at home less than 45 days after they debut on the big screen." The article went on to note, "Studio executives say they would prefer to reach a deal with theaters, one reason they have been reluctant to unilaterally announce a new policy." Typically, would you expect that the profits of movie studios are more at risk from the bargaining power of theaters, or would you expect that the profits of theaters are more at risk from the bargaining power of movie studios? Have streaming and other online ways of watching movies changed the relative bargaining power of movie studios and theater owners? Briefly explain.
What do barriers to entry have to do with the extent of competition in an industry? What is the most important reason that some industries, such as music streaming, are dominated by just a few firms?
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