Question

Please solve and/or tell me if my answers are correct.

Game Tree Problem 3 TOMS, a shoe retailer founded in 2006 by Blake Mycoskie, was founded on the One to One principle. For each pair purchased of TOMS shoes, the TOMS company would donate a pair to a child in need; over 60 million pairs of shoes have been donated worldwide so far. Sketchers, another shoe retailer, decided to release a line of shoes in 2010 and name them BOBS. For every purchase of BOBS, Sketchers will also donate a pair of shoes to a child in need; over 14 million pairs of shoes have been donated to date. This scenario provides an excellent example of an entry game. Suppose you are making decisions for firms like Toms (Firm A) or Sketchers (Firm B). Suppose Firm A currently enjoys $16 million in profit each year. If Firm B enters the market with a similar product and Firm A does nothing, Firm A's will lose $6 million in profits and Firm B will gain enough market share to earn $9 million in profits. Firm A could try to combat the entry of Firm B by lowering prices, increasing advertising, or moving to a Two for One principle but this would lower their profits an additional $8 million, because entry was combated, Firm B's estimated profits will be lower by $10 million if they enter. Firm A could also take the same actions to combat entry if Firm B decided not to join the market; the effect on their profits is the same. All relevant values are gathered in the table below. Millions of dollars Firm A Current Profit Loss If Allows Entry Additional Loss If Combats Entry Firm B Estimated Profits Loss If Firm A Combats a) A game tree modeling this game is provided below. Enter payoffs in millions of dollars. Firm B Node A Decision | Enter Do Not Enter Firm A Firm A Node B Decisions Combat Entry Allow Entry Combat Entry Allow Entry 2 10 0 Payoff of Firm A 2 10 Payoff of Firm B -10 9 b) What will Firm A and B each decide to do? Firm A should allow entry. Firm B should enter. c) How much profit will each firm make based on this decision? Firm A will earn $ 1 10 million Firm B will earn $ 9 million d) Would a threat from Firm A to combat entry be credible? The threat from Firm A to combat entry would not be credible.

Answer 1

& firm A Of from B doesn't enter, Then from Añ= 16. from BA=0. of B enters of Allow Entry then TA= (16-6)= 10. TB = 9 If combats entry TA= (16-6-8)=2. Hf Benteng, A combats, TB = ( 940) = - 1.

Game Thee From 6 Enter does nitentes I Allow 10 9 combat 16 o Allow. 16 L I combat TA 2 TB - 1 I b.) Solving backwards. e firm A Allow entry from B Enter doesnit А combat (-12) allow f ollow I Combat (860,16) C) T made from A 10 . B . 9 Threat from - Į x from A to combat. (9,10) would not be aedible .. doesn't. (0,16) d.)