Provide 1 response to each student post. Each response should be 150 words each. Turnitin is being used to check for plagiarism and Please use APA format. Mark Engel XXXXXXXXXX:11am Jun 11 at 7:11am...

Mark Engel

Our text this week discusses game theory in mutual dependence recognized oligopoly, where a game is a situation in which two or more players choose strategies to compete for a reward or payoff of some kind (Douglas, XXXXXXXXXXWhen dealing with mutual dependence recognized oligopoly, the game is producing and selling a similar product, the strategy is advertising expenditures, and the payoff is market share and the profit associated with that market share (Douglas, XXXXXXXXXXIn this case, both GE and Maytag are selling a similar product, that being clothes dryers. In trying to find out if GE can successfully prevent Maytag from entering the market by increasing its advertising levels, I believe they can, especially if they continue to increase its advertising levels. The table in the discussion post shows the following:

If GE spends another $2 million on advertising bringing it to $14 million, we see that if Maytag wants to stay in the game, they would make a profit of $1 million, while GE would profit $20 million. Now, on the flip-side, if Maytag decides to stay out, they will net zero profit, while GE will bring in $30 million, which I would believe would be a hard choice for Maytag to make. Now, looking at the top ride quadrant of this chart, we see that if GE added $2 million to the existing $0.7 million, they would then be spending $2.7 million. If Maytag decided to stay out, they again would net zero profit, while GE would be bringing in $35 million, and if Maytag decided to enter into the game, they would profit $12 million, while GE would be bringing in just slightly more with $15 million. I believe that the additional spending would deter Maytag when $14 million was spent on advertising, however, if Maytag decided to get in the game when only $2.7 million was spent, it would be beneficial for Maytag to remain relevant.

Reference

Douglas, E. (2012) Managerial Economics. Retrieved from

http://content.ashford.edu

Gerick Thunstrom

Game Theory and Strategic Behavior

The concept of this discussion revolves around game theory which utilizes the prisoner’s dilemma to elaborate on the idea. In the prisoner’s dilemma concept, each party has a dominant strategy to gain the most(Douglas, XXXXXXXXXXHowever, when each party enacts their dominant strategy, this usually results in a zero-sum game where all players are worse off. In the game where Maytag and GE are competing for market shares (Figure 1.1), it is apparent the relationship between Maytag entering and GE increasing their advertising costs to maintain market share.

Figure 1.1

With the information provided in figure 1.1, Maytag might not want to enter into the market if GE is controlling 95% of the market. However, it is important to mention that GE is increasing its annual advertising costs by $11.3M more to control the market at 95%. This may not be a realistic increase and Maytag will probably estimate that GE will not increase their budget to do so. However, if GE pays only $0.7M in advertising costs, Maytag will certainly enter the market at 44% market control, assuming all else equal. The equilibrium outcome in this game is that Maytag does enter the market, and GE doesn’t increase its advertising costs.

Note: The market share calculated above was estimated by assuming total market profits is equal to total market. For instance, $1M + $20M = $21M, $21M = 100% market. Therefore, 1/21 = .05 or 5%.

If GE accepted the suggestion of an analyst to add $2M to the $12M advertising budget it would certainly deter Maytag from entering the market. Assuming that $12M would establish a 95% market share from a 56% market share by adding $11.3M, one could derive the impacts of adding $2M to the budget. Figure 1.2 demonstrates the derivative.

Figure 1.2

The change in cost is a 39% change. Therefore, a $1M increase would induce a 3.45% increase in market share for GE. If GE increases its spending by $2M, it would increase its market share by 6.9%, well beyond the necessary 5% increase needed for market control.

If the GE was to spend $2M but lose $1.5M in profit by doing so, the loss in profits would not make a difference to Maytag. This is because the loss in profits is based on increase cost and not a decrease in revenues. An increase in costs has no impact on market shares. The company incurring an increase in cost is the only player being impacted. GE should not pursue the increase in $2M because there is a negative net profit in the short-term.

References

Douglas, E. (2012). Managerial Economics. Bridgepoint Education, Inc. Retrieved from https://content.ashford.edu/