Module 3 – Case

Market Structure and Game Theory

Assignment Overview

As always, make sure to thoroughly review the required background
materials before starting the assignments. The assignment questions
will require you to do some calculations and also apply the concepts
from the module. Question 3 differs from previous assignments in that
you have to use an online simulation tool; but this activity should be a
fun break from the standard numerical problems you have been doing.

Case Assignment

1. 1. For this problem use the Herfindahl Index to compute market concentration:
      1. Suppose Apple has 45% of the U.S. market share for smartphones,
         followed by Samsung with 30%, LG with 9%, Motorola with 8%, HTC with 6%,
         and Nokia with 2%. What is the Herfindahl Index for the smartphone
         industry based on these numbers? Based on the Herfindahl Index, do you
         think the government would be willing to approve a merger between Apple
         and Samsung?
      2. Now suppose Nokia and Motorola come out with a new smartphone that
         takes away a huge chunk of market share from Apple and Samsung. The new
         market shares are 25% for Apple, 20% for Samsung, 20% for Motorola, 20%
         for Nokia, 10% for LG, and 5% for HTC.
   2. Use what you learned about perfect competition, monopoly, and oligopoly to answer these questions:
      1. In the table below is the quantity produced, the price, the fixed
         costs, and variable costs for a perfectly competitive firm that faces a
         constant price of $150 for its product regardless of the quantity it
         sells. Use the information in the first four columns to calculate the
         number for the last four columns. At what quantity should they produce
         based on what you find with your results?
      2. How do you think your answer might change if it became a monopolist
         with all of its competitors leaving the market? Or if it became an
         oligopoly with only one or two competitors?
         

1. 1. You’ve read about the prisoner’s dilemma in the background
      readings. Suppose you are a business owner with just one main
      competitor. If neither you nor your competitor cut your prices, you
      will both be more profitable. However, if your competitor lowers its
      prices and you keep your prices high, then you will lose all of your
      sales to your competitor. Every month you and your competitor place
      advertisements in the local newspaper with your price – so you need to
      decide each month whether or not to keep prices high, or lower them
      based on what you think your competitor might do.

      Go to the following webpage and test out some of your potential price strategies:
      http://www.gametheory.net/Mike/applets/PDilemma/Pdilemma.html

      The
      strategy “defect” indicates lowering your prices. The strategy
      “cooperate” means keep prices the same. Try out different strategies,
      such as cooperating all the time or defecting sometimes. There are five
      different rounds of this game, each with a competitor with different
      personalities and different strategies. Play all five rounds and
      experiment with different strategic approaches. Report your scores for
      each round, and discuss which strategies seemed to work the best for
      you.