Question

Consider the following payoff matrix in which the numbers indicate the profit in millions of dollars for an oligopoly based on either a high-price or a low-price strategy.

Firm X Strategy High-price Low-price X = $200 X = $250 Y = $200 Y = $ 50 X = $ 50 X = $ 50 Y = $250 Y = $ 50 Firm Y Strategy High-price Low-price

a.   Situation 1:    Each firm chooses a high-price strategy.   

Result:    Each firm will earn $ 200 million in profit for a total of $ 400 million for the two firms.

b.   Situation 2:   Firm X chooses a low-price strategy while Firm Y maintains a high-price strategy.  

Result: Firm X will earn $250 million and Firm Y will earn $50 million. Compared to Situation 1, Firm X has an incentive to cut prices because it will earn $50 million more in profit and Firm Y will earn $150 million less in profit. Together, the firms will earn $300 million in profit, which is $100 million less than in Situation 1.

c. Situation 3: Each firm chooses a lo dominant strategy.

Result: Each firm will earn $________ million in profit for a total of $________ million for the two firms. This total is $________ less than in Situation 1.

Suppose that the distribution of sales within an industry is as shown in the table.

FIRM	SHARE OF TOTAL MARKET SALES
A	25
B	24
C	13
D	11
E	7
F	7
G	5
H	5
I	3

1.Calculate the four-firm concentration ratio for this industry.

2. Calculate the Herfindahl Hirschman Index (HHI). for this industry

3.How can an oligopoly form when there are network effects and market feedback?

Answer 1

The results of Situation 1 and 2 have been correctly mentioned.

The other solutions are as follows:

Sitaution 3 Result:

Each firm chooses a dominant strategy. Each firm will earn $____50____ million in profit for a total of $___100_____ million for the two firms. This total is $___300_____ less than in Situation 1.

This is because the dominant strategy of both the firms is "Low-price".

Answer 1

Four firm concentration Ratio = Market Shares of the Four largest firms

= 25 + 24 + 13 + 11

= 73

Answer 2

Company	Market Share	(Market Share)2
A	25	625
B	24	576
C	13	169
D	11	121
E	7	49
F	7	49
G	5	25
H	5	25
I	3	9
TOTAL		1648

Herfindahl Index = 1648