Answer to Question #276715 in Microeconomics for cyah

Question

Assuming there are two companies selling personal computers,Company Jackfruit Computers and Company Mangoes Computer. They both have an inventory of personal computers that they would like to sell before a new generation of faster, cheaper machines is introduced. The question facing each competitor is whether or not they should widely advertise a “close out” sale on these discontinued items, or instead let excess inventory work itself off over the next few months. The net revenue to each firm in millions of $, is depicted in the payoff matrixbelow:

 

Mangoes

Jackfruit

 

Advertise

Don’t advertise

Advertise

M:    $5

J:     $5

M:    $2

J:     $20

Don’t advertise

M:    $20

J:     $2

M:    $10

J:      $10

 

a. Determine the dominant strategy for each firm.

b. Would collusion work in this case? Explain.

Answer 1

a)Advertising is more beneficial for mangoes company since it raises the price of their computers,therefore they should continue advertising. On the other hand,Jackfruit company accrues most money when they do not advertise their products,hence they must not advertise to be more profitable.

b) Collusion strategy would certainly work since they would reduce direct competition whilst nullifying market uncertainty. Thus,they would achieve more profits colluding with one another