# Market structure and game theory

Module 3 – Case

Market Structure and Game Theory

Assignment Overview

As always, make sure to thoroughly review the required background materials before starting the assignments.  The assignment questions will require you to do some calculations and also apply the concepts from the module. Question 3 differs from previous assignments in that you have to use an online simulation tool; but this activity should be a fun break from the standard numerical problems you have been doing.

Case Assignment

1.

1.    For this problem use the Herfindahl Index to compute market concentration:

a.    Suppose Apple has 45% of the U.S. market share for smartphones, followed by Samsung with 30%, LG with 9%, Motorola with 8%, HTC with 6%, and Nokia with 2%.  What is the Herfindahl Index for the smartphone industry based on these numbers? Based on the Herfindahl Index, do you think the government would be willing to approve a merger between Apple and Samsung?

b.    Now suppose Nokia and Motorola come out with a new smartphone that takes away a huge chunk of market share from Apple and Samsung. The new market shares are 25% for Apple, 20% for Samsung, 20% for Motorola, 20% for Nokia, 10% for LG, and 5% for HTC.

2.    Use what you learned about perfect competition, monopoly, and oligopoly to answer these questions:

a.    In the table below is the quantity produced, the price, the fixed costs, and variable costs for a perfectly competitive firm that faces a constant price of \$150 for its product regardless of the quantity it sells.  Use the information in the first four columns to calculate the number for the last four columns.  At what quantity should they produce based on what you find with your results?

b.    How do you think your answer might change if it became a monopolist with all of its competitors leaving the market?  Or if it became an oligopoly with only one or two competitors?

3.    You’ve read about the prisoner’s dilemma in the background readings.  Suppose you are a business owner with just one main competitor.  If neither you nor your competitor cut your prices, you will both be more profitable.  However, if your competitor lowers its prices and you keep your prices high, then you will lose all of your sales to your competitor.  Every month you and your competitor place advertisements in the local newspaper with your price – so you need to decide each month whether or not to keep prices high, or lower them based on what you think your competitor might do.

Go to the following webpage and test out some of your potential price strategies:
http://www.gametheory.net/Mike/applets/PDilemma/Pdilemma.html

The strategy “defect” indicates lowering your prices. The strategy “cooperate” means keep prices the same. Try out different strategies, such as cooperating all the time or defecting sometimes.  There are five different rounds of this game, each with a competitor with different personalities and different strategies.  Play all five rounds and experiment with different strategic approaches.  Report your scores for each round, and discuss which strategies seemed to work the best for you.

Assignment Expectations

·        Answer the assignment questions directly.

·        Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.

·        For computational problems, make sure to show your work and explain your steps.

·        For short answer/short essay questions make sure to reference your sources of information with both a bibliography and in-text citations. See the Student Guide to Writing a High-Quality Academic Paper, including pages 11-14 on in-text citations. Another resource is the “Writing Style Guide,” which is found under “My Resources” in the TLC Portal.

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