CRITICAL THINKING FIVE1.pdf

CRITICAL THINKING FIVE1

Brad Donbach

Liberty University

Business 620

Critical Thinking Five

Discussion Question 2: (a) What are the advantages of the Herfindahl index over

concentration ratios in measuring the degree of concentration in an industry? (b)

What is the disadvantage of both?

share for each firm within an industry. The advantage is Herfindahl’s more

complete study of an industry through its measurement of all firms, not just the

largest.

industry’s entry barriers or turnover rate of firms within the industry.

Concentration ratio’s as described previously, also lack the ability to monitor or

analyze all firms within an industry; by doing so a portion of the industry is left

unreported.

Discussion Question 8: In what way does OPEC resemble a cartel? How successful

was it?

cartel stems from the formal agreement between groups of oil producers in an effort to

regulate pricing. The U.S. Government has made cartels illegal; currently U.S. trade laws

currently protect OPEC’s establishment. Throughout its history OPEC has remained

rather successful in its bid to maintain pricing stability of the oil industry. However, in

1973 there was an oil shock that was felt through the entire world. This led to exploration

of alternatives to oil, which led to shrinking market share for OPEC. This shrinking has

been reversed in recent years, as some of the most populous countries (china, india, etc.)

have begun a modernization of industry which has driven large increases in the demand

for oil.

Problem 1: Find the Herfindahl index for an industry composed of (a) three firms—

c) (0.102)*10=0.01*10=10%

Problem 5: Starting with the reaction functions of duopolists A and B from Problem

4, find the Cournot solution algebraically.

QA = 12- ((12-QA)/ (2/2))=(24 – (12 – QA))/ (2/2)= (24 – 12 + QA)/ (2/2)= 12 + QA/4

4QA = 12 + QA

QA = 4

QB = (12 – 4)/2=4

Q= 4 + 4= 8

8 = 12 – P

8–12 = –P

threat of new entrants, (4) threat of substitute products, and (5) competitive rivalry within

an industry. The Five Forces Model is used to measure the attractiveness of an industry.

(1)Bargaining power of customers-The threat of bargaining power of customers is low.

industry. With the cost to switch firms remaining low, consumers are flexible to

choose firms based on times, locations, and prices.

(2)Bargaining power of suppliers- There are only two major suppliers of aircrafts for

major airlines-Airbus and Boeing. Even though most parts are standardized, it is

produce parts to help in the reduction of some costs; the manufacturing price of

CRITICAL THINKING FIVE3

(4)Threat of substitute products-Currently the threat for substitute is minimal due to the

travel as the fastest and most convenient option.

(5)Competitive rivalry within an industry-The competition is extremely high amongst

current firms in the industry. The competitors remain rather constant due to the high

barrier to entry and high fixed costs, which limit a firms exit. The way to win

competition is in differentiation of services up to, during and after the flight.

To enter, the airline industry is rather unattractive to do the high costs of entry, as well as

television solve the prisoners’ dilemma for cigarette producers?

The law solved the prisoners’ dilemma for cigarette producers by answering the question

of advertising. Some producers where willing to advertise and accept the associated costs,

while others chose to accept a decrease in sales while also eliminating advertising costs.

This would have negatively impacted the industry has a whole. Prisoner’s dilemma is the

concept that if a group of individuals seek what’s in their personal best interests then the

outcome for everyone would be worse than if they would have all worked together. By

entirely banning advertising for all cigarette producers, they were able to cut the cost of

advertising out of the cost of cigarettes, increasing profits. While all firms where dealt

with the decrease in sales from lack of advertising.

Low Price(1, 1)(3, 21)

High

(21, 3)(2, 2)

Price

a)Tit-for-tat is a game theory that is subject to a payoff matrix based on retaliation

and/or cooperation. The theory is best demonstrated between two parties; based

on ones response the other party will act in a replicating fashion. If party A is

cooperative than party B will also be cooperative.

prisoners’ dilemma, it is thought that cooperation will lead to the best results for

CRITICAL THINKING FIVE4

Problem 2: From the following payoff matrix, where the payoffs are the profits or

losses of the two firsts, determine (a) whether firm A has a dominant strategy, (b)

Firm B

High Price(-1,3)(4,2)

The best strategy for firm A is to choose a high price at 4 where firm B is at 2, while firm

B should choose a low price at 3 where firm A is at -1. The Nash equilibrium would be to

sell at 1.

Problem 6: Explain why the payoff matrix in problem 1 indicates that firms A and B

faces the prisoner’s dilemma.

This matrix does not demonstrate a prisoners’ dilemma, because when both firms choose

their low price or both choose their high price, one firm will fair better than the other.

Problem 10: Given the following payoff matrix, (a) indicate the best strategy for

each firm. (b) Why is the entry-deterrent threat by firm A to lower the price credible

High Price(4,5)(6,3)

a)Strategy for firm A should be to set a high price at 6, this will force B not to enter

Firm B should choose to set a high price at 5 which will cause Firm A would be

less profitable than B.

b)Yes, Firm A can constrain its own behavior, to gain a competitive advantage over

firm B.

c)A threat is only credible if followed through. Firm A could accept lower profits to

make its threat credible.

Individual problem 15-4: The following represents the potential outcomes of your

first salary negotiation after graduation: Assuming this is sequential move game