Summary 437b. Find dealer 1’s best inventory response to the various inventory
actions of the other dealers. (Circle the greatest profit entry in each
column of the table.)
c. What is the equilibrium inventory level for each of the four dealers?
d. If the dealers colluded to limit inventories, what would be the
maximum monopoly profit they could earn collectively? Would
individual dealers have an incentive to cheat on their inventories?
Explain.
e. What would be the effect of free entry into the used-car business?
S2. In Problem 12, suppose that each firm has a $10 million direct sales
budget to allocate between the two markets. Again, revenues in the
markets are split in proportion to direct sales dollars spent.
a. Create a three-entry spreadsheet to find firm A’s total revenue if it
spends $7 million in market I (and the remainder in market II),
while firm B spends $6 million there. Which firm earns the greater
total revenue?
b. Use the spreadsheet optimizer to find firm A’s optimal spending split
if firm B’s split is $7 million–$3 million.
c. Find firm A’s optimal spending splits, if firm B spends $5 million, $6
million, $6.25 million, $9 million, or $9.5 million in market I. What is
the symmetric equilibrium of this spending game? Provide an
intuitive explanation for the equilibrium.Suggested References
The following references are classic treatments of game theory.
Schelling, T. C. The Strategy of Conflict.Cambridge, MA: Harvard University Press, 1990.
Von Neumann, J., and O. Morgenstern. Theory of Games and Economic Behavior.Princeton, NJ: Prince-
ton University Press, 1944.
Appraisals of game theory include
Camerer, C. “Progress in Behavioral Game Theory.” Journal of Economic Perspectives(Fall 1997):
167–188.
Gul, F. “A Nobel Prize for Game Theorists: The Contributions of Harsanyi, Nash, and Selton.” Jour-
nal of Economic Perspectives(Summer 1997): 159–174.
A number of texts provide comprehensive and up-to-date treatments of game theory.
Camerer, C. Behavioral Game Theory.Princeton, NJ: Princeton University Press, 2003.
Dixit, A., and S. Skeath. Games of Strategy. New York: W. W. Norton, 2004.
Fudenberg, D., and J. Tirole. Game Theory.Cambridge, MA: MIT Press, 1994.
Myerson, R. Game Theory.Cambridge, MA: Harvard University Press, 1997 (Paperback).
Osborne, M. J. An Introduction to Game Theory.New York: Oxford University Press, 2004.
Rasmusen, E. Games and Information,4th ed. Cambridge, MA: Blackwell, 2006.
For applications of game theory to competitive strategy and business problems, we highly recommend
Dixit, A. K., and B. J. Nalebuff. Thinking Strategically: The Competitive Edge in Business, Politics, and
Everyday Life.New York: W. W. Norton, 1993 (paperback).c10GameTheoryandCompetitiveStrategy.qxd 9/29/11 1:33 PM Page 437