Answer to Question #139023 in Economics for rishi

Question

Question 1

Assume that there are two major telecommunication companies operating in a country. The first promises to match the other’s prices. The other promises always to sell at 1 cent cheaper than the first for each 1 MB data plan. Describe the likely sequence of events in this “game theory” and the likely eventual outcome. Could the promise of the second company be seen as credible?

Discuss and provide the expected outcomes with examples.

Question 2

In perfect competition market and monopolistic competition, invention and innovation are promoted by the competition among the rivals. Are there any features of free-market capitalism which would discourage innovation?

Evaluate and justify your argument with examples.

Answer 1

Question 1

The first company will set the price, the second will set the price which is 1 cent cheaper than the first for each 1 MB data plan, then the first will also decrease the price and so on, until the price is as low as it can cover the costs per unit. So, the promise of the second company couldn't be seen as credible.

Question 2

If there are some market failures (negative externalities, free rider's problem etc), the costs are too high to have profits to cover the innovation costs or the product is homogeneous, then free-market capitalism can discourage innovation.