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
For this problem use the Herfindahl Index to compute market
concentration:
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?
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.
Use what you learned about perfect competition, monopoly,
and oligopoly to answer these questions:
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?
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?
Quantity
Price
Fixed Cost
Variable Cost
Total Cost
Marginal Cost
Total Revenue
Profit/
Loss
0
150
200
–
1
150
200
$140
2
150
200
$240
3
150
200
$320
4
150
200
$410
5
150
200
$520
6
150
200
$650
7
150
200
$810
8
150
200
$1,010
9
150
200
$1,310
10
150
200
$1,710
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.
