Hasbro is considering selling a new game called Oligopoly, which will introduce children (ages 5 to 10) to the joys of insider trading and imperfect competition. Hasbro must decide very soon whether to introduce this game, and if it decides to go ahead, it will have to spend $4 million to complete the game’s design, advertise it, and set up production. In addition, it will cost Hasbro $5 per unit to produce the game. Hasbro’s competitor, Mattel, is also considering selling an economic education game called Cash Against Humanity that will compete directly with Oligopoly. Mattel faces higher fixed costs than Hasbro; in particular, it will cost them $7.5 million to start the project. But Mattel will have the same per-unit production cost of $5. Based on their market research, both companies learn that there will be 2 million potential customers, and each customer will buy one game if the price does not exceed their willingness-to-pay of $15. If both games are introduced, competition will force the two companies to charge $12, and they will split the market equally. (The two games are somewhat differentiated, and so the price competition will not be too terribly fierce.) If only one company introduces its game, it will be a monopolist in the market. The need to get these games out in time for the Black Friday Stampedes means that each company is unable to wait and see what their competitor does before deciding whether to go ahead: they must make decisions simultaneously while trying to maximize their profits. As an analyst, you are making a prediction about how many economics education games will be introduced. (a) Describe this strategic interaction as a normal-form (matrix) game. (b) Does Hasbro have a dominant strategy? What about Mattel? (c) What do you predict as the outcome of this strategic interaction, and why?
Hasbro is considering selling a new game called Oligopoly, which will introduce children (ages 5 to 10) to the joys of insider trading and imperfect competition. Hasbro must decide very soon whether to introduce this game, and if it decides to go ahead, it will have to spend $4 million to complete the game’s design, advertise it, and set up production. In addition, it will cost Hasbro $5 per unit to produce the game. Hasbro’s competitor, Mattel, is also considering selling an economic education game called Cash Against Humanity that will compete directly with Oligopoly. Mattel faces higher fixed costs than Hasbro; in particular, it will cost them $7.5 million to start the project. But Mattel will have the same per-unit production cost of $5. Based on their
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