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Microeconomics

Anna Blajer-Gotębiewska M. Sc.

Exercise 8. Consider the fołlowing seąuential gamę:

There are three competitors (TOM Inc., GARFIELD Inc. and CFIESTER Inc.) operating in the same city and producing the same good. Each of them wants to set up its agency in other city. TOM Inc. is already prepared to set up its agency. Management Board of TOM Inc. takes into consideration setting up their agency in City 1 or City 3. GARFIELD Inc. will be soon ready to choose the location for its agency. Management Board of GARFIELD Inc. determined City 1 or City 2 as the best for them. As a result of financial problems CHESTER Inc. will be the last one to set up its agency (in City 1 or City 3). The potential amount of profits, that one can gain from the City 1 is 54 m.u., from City 2 - 36, from City 3 - 60.

If two competitors enter the same city, they will divide half their profits. If three competitors enter the same city, they will divide the profits to three parts.

a) Complete an extensive form of the gamę with payoffs.

b) Find the solution using the backward induction method.

Exercise 9. Consider the fołlowing entry deterrence gamę with two retailers in the market narned KOALA and PANDA. Established retailers are is facing possible competition from a rival (KANGAROO). So they may try to stave off entry by price cutting campaign and the rival may enter or not. Payoffs are given in the extensive form of the gamę. Find the solution using the backward induction method.

KOALA