Economics Assignment Sample Online

Part: 2

1. It can be gathered that each company is faced with two choices- to advertise (A) or not to advertise (NA). If both companies choose A then they both get a payoff of $1m. If both choose NA then they save the advertising cost and payoffs would be $2m for each company. However, if one firm chooses A while the other chooses NA then the payoff to the advertiser is $2.5m, while the other firm gets $1m. The payoff matrix is thus:

   	OL’CAB
   YUBER		ADVERTISE (A)	NOT ADVERTISE (NA)
   	ADVERTISE (A)	1   1	1   2.5
   	NOT ADVERTISE (NA)	2.5 1	2 2

2. A dominant strategy is one where regardless of what any other players do, thestrategyearns the player a larger payoff than any other (Telser2016). Here it can be seen that neither OL’CAB nor YUBER is faced with any strict dominant strategy. Consider, that YUBER chooses to advertise. In this case, OL’CAB is indifferent between advertising or not since both choices fetch $1m. However, if YUBER chooses not to advertise, then OL’CAB is better off advertising as it fetches $2.5m over $2m if it doesn’t. Here, it can be found that there is no strictly dominant strategy for OL’CAB. However, a weakly dominant strategy exists in favor of advertising. Similarly, for YUBER as well, it is observed that advertising is the weakly dominant strategy.
3. Nash equilibrium is where each player’s strategy is optimal and neither has any motive to change the strategy (Myerson 2013). In our example, the Nash equilibrium is advertising for both YUBER and OL’CAB. Both the companies know that they would earn a higher payoff if they didn’t advertise ($2m). At the same time, both know that if their rival advertises and they do not, then the rival company would earn a much higher pay-off ($2.5m) and it would earn only $1m. This is why both companies feel it would be better off advertising than not.
4. In a monopolistic or oligopolistic market structure one often comes across collusion, where rival firms co-operate for their mutual benefit. Collusion results in an unfair market advantage, much like in the case of monopoly (Ichiishi2014).Firms under a collusion often charge a much higher price than the market equilibrium price, which is called price-fixing. They may also collude to produce a lower quantity of the good or service in order to drive up market prices. In such a scenario, the customers are adversely affected. Competition in the market is also low, since a collusion ensures that new firms are not able to enter the market freely.

References:

Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.

Ichiishi, T., 2014. Game theory for economic analysis. Elsevier.

Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.

Myerson, R.B., 2013. Game theory. Harvard university press.

Telser, L.G., 2016. Competition, collusion and game theory. Springer.

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