Question

please show explanations for a,b,c,d and e. Thank you.

3. Maytag wants to prevent Whirlpool from entering its market. The following payoff table shows the profit each firm would earn in each of the four possible decision combinations: Maytag High Low Stay out AW $0, $35 $0, $50 Whirlpool D W Enter -$10, S20 $30, S30 Payoffs in millions of dollars of profits. a. If Maytag and Whirlpool make their decisions simultaneously. Whirlpool is likely to St out, enter) and Maytag is likely to price lew (low, high). b. Suppose Maytag says to Whirlpool, "If you enter, I will price low until you decide to exit." This threat is not credible because Now suppose Maytag makes the first move and expands its productive capacity before Whirlpool makes its entry decision, which results in the following payoff table: Maytag High Low Stay out $0, S40 $0, S30 Whirlpool Enter $14, S14 -$12, S16 Payoffs in millions of dollars of profits. c. Use the game tree below to show this capacity expansion decision. Let Maytag make the first decision to expand capacity or not to expand capacity. Then let Whirlpool make its entry decision. Finally, let Maytag choose its price. Show the likely path and outcome on the game tree and Maytag will earn profits of S pool will earn profits of S P a Low Ender P High Moytag Do NOT expand P Low Stay out Enter Mayag Expand oapacity Stay out Moytag now) deter Whirlpool from entering (strong, credible, irrevocable) e. Based on your game tree in part c, Maytag(still cannot, can because the threat to reduce price if entry occurs is now

Answer 1

a) When both the players moves simultaneously, in that case Whirlpool will choose to stay out and Maytag will choose to keep the price low. The reason is that if any of the player deviates from this decision then that players payoff decreases. In other words there is no positive deviation possible. And this is what Nash equilibrium is all about. A strategy from which players do not move.

b) The reason for this is that, if Whirlpool enters and Maytag keeps the price low then in that case Whirlpool is making a negative profits of 10. Which means Whirlpool is not gonna enter the market. So, Maytag's threat to the Whirlpool is not credible.

c) So, there 8 end nodes of the above graph. Followings are the payoffs of each of the 8 nodes:

i) (-10,20), ii) (30,30), iii) (0,35), iv) (0,50), v) (-12,16), vi) (14,14), vii) (0,30), viii) (0,40)

and looking at the payoff, Maytag will expand its productive activities and get the payoff of 40.

d) By backward induction we will see that Whirlpool will get a profit of $0 and Maytag will get a profit of $40.