Question

Firm 1 Sell Give away 1: $3 1: $4 Sell 2: $3 :-$1 Firm 2 1: $1 1: $2 Give away 2: $4 2: $2

Oligopoly

Two software firms have developed an identical new software application. They are debating whether to give the new application away free and then sell add-ons or sell the application at $30 a copy. The payoff matrix is above and the payoffs are profits in millions of dollars.

a) What is Firm 1's dominant strategy?
b) What is Firm 2's dominant strategy?
c) What is the Nash equilibrium of the game?

d) Does an oligopoly produce the efficient quantity of output or does it create a deadweight loss?

e) Compare the market outcomes among a perfectly competitive firm, a monopolistic firm and an oligopolistic firm.

f) What is the cooperative outcome if cartel agreement is allowed?

Answer 1

1/2	sell	give away
Sell	(3*,3•)	(4*,-1)
Give away	(-1,4•)	(2,2)

A) firm 1 dominant strategy = sell

firm 1 will always prefer to play Sell, irrespective of any choice of Firm 2

Sell is always the best response strategy for firm 1, as it always gets more profit from sell , whether 2 plays sell or give away

* Shows BR of firm 1

• shows BR of firm 2

b) Firm 2 dominant strategy = sell

firm 2 always earns more profit from sell, so it's a dominant strategy for 2

c) NE:

(Sell, sell), both Firms will sell

where both * & • are present

D) an oligopoly doesn't produce the efficient output level & so it leads to deadweight loss

Bcoz in oligopoly, the price is more than MC, so it's not same as perfect Competition.

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It's mandatory to answer only first Four parts as HOMEWORKLIB RULES rule