Game Theory FRQs December 2015
Game Theory FRQs
Two bus companies, Roadway and Rankin Wheels, operate a route from Greensboro to Spring City, transporting a mix of passengers and freight. They must file their schedules with the local transportation board each year and cannot alter them during that year. Those schedules are revealed only after both companies have filed. Each company must choose between an early and a late departure. The relevant payoff matrix appears below, with the first entry in each cell indicating Roadway's daily profit and the second entry in each cell indicating Rankin Wheels' daily profit.
In which market structure do these firms operate? Explain.
Oligopoly – there are only 2 firms and/or they are mutually interdependent
(b) If Roadway chooses an early departure, which departure time is better for Rankin Wheels? Early
(c) Identify the dominant strategy for Roadway. Early
(d) Is choosing an early departure a dominant strategy for Rankin Wheels? Explain.
No – if Roadway leaves late, then Rankin is better off leaving late too
(e) If both firms know all of the information in the payoff matrix but do not cooperate, what will be Rankin Wheels' daily profit? $900. Roadway has a dominant strategy and will choose early. Rankin then chooses early also.
2. Two competing retail firms, Red Shop and Blue Mart, are studying potential locations for new stores in the suburbs of a major city. Each firm must choose between a location north of the city and a location south of the city. The payoff matrix is shown below, with the first entry in each cell indicating Red Shop's daily profit and the second entry indicating Blue Mart's daily profit. Both firms know all of the information in the payoff matrix.
If Red Shop chooses a location south of the city, which location is better for Blue Mart? Explain. North – $4,000 vs. $1,000 if they choose South
Is choosing a location to the south of the city a dominant strategy for Red Shop? Explain. No. If Blue Mart chooses South, Red Shop would prefer North
If the two firms cooperate in choosing locations, where will each firm locate?
Red Shop will choose South and Blue Mart will choose North
Assume that the south suburb has enacted an incentive package to attract new business. Any firm that locates south of the city will receive a subsidy of $2,000 per day. Redraw the payoff matrix to include the subsidy.
North $900/$1,800 $3,000/$5,500
South $7,000/$4,000 $3,500/$3,000