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Suppose that a seller in a duopoly needs to decide whether to spend a lot or a little on advertising. Assume that the consumers are already reasonably well informed about the product, so the purpose of a lot of advertising is to draw customers away from the rival. How could the payoffs from this situation resemble those in Figure 17.6? Draw a payoff matrix illustrating this case (with options “spend a lot” or “spend a little” and outcomes of low, moderate, or high profits) and describe the noncooperative solution. What if the government decided to ban advertising in this industry (as it has, in the past, banned advertising of cigarettes and alcohol in various media)? Would that help or hurt the companies’ profits?

Suppose that a seller in a duopoly needs to decide whether to spend a lot or a little on...

 
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When Braeburn Publishing priced its poetry book at $5, it sold 5 books, and when it priced the volume at $8, it sold 4 books. You can calculate that its revenues were higher with the higher price. Suppose that, from further test marketing, this firm determines that it faces the demand curve described by the following schedule.

When Braeburn Publishing priced its poetry book at $5, it sold 5 books, and when it priced the...

a. Graph the demand curve for the poetry book, labeling carefully. (Compare your graph to Figure 5.1.)

b. Calculate total revenue and marginal revenue at each output level, and add a marginal revenue curve to your graph.

c. Can the $8 price be Braeburn’s profit-maximizing choice? Why or why not?

d. Suppose that, thanks to computerized, on-demand publishing technology, Braeburn can produce any number of books at a constant cost of $5 each. (That is, average cost and marginal cost are both $5 for any quantity of books, and total costs are simply the number of books times $5.) Add a marginal cost curve to your graph. (It will not look like the “usual” MC curve—it will be horizontal.)

e. What are Braeburn’s profit-maximizing price and output levels for the poetry book? State these, and label them on the graph.

f. What level of profit would Braeburn earn with the $8 price? (Recall that profits equal total revenue minus total cost.) What is the level of profit with the price you just found that maximizes profit?

 
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Suppose that two oligopolistic retail chains are considering opening a new sales outlet in a particular town. The changes to each firm’s profits, depending on the actions taken, are given in the following payoff matrix. If a chain does not open a new outlet, it earns no addition to profits. If one of the chains is the only one to open an outlet, it makes high additional profits. If they both open outlets, they have to split the available market, and they make only more moderate additional profits.

Suppose that two oligopolistic retail chains are considering opening a new sales outlet in a...

a. If Firm 1 decides to open a new outlet, but Firm 2 does not open a new outlet, how much additional profit does each firm make?

b. If Firm 1 decides to open a new outlet, what is the worst that can happen to it? If Firm 1 decides not to open a new outlet, what is the worst that can happen to it? Which option, then, should Firm 1 choose, if it wants to make the choice that leaves it best off, regardless of what the other firm does?

 c. If the firms are noncooperative and each firm makes the choice that will leave it best off regardless of the other’s choice, what will the outcome be?

d. Is this like the “prisoner’s dilemma,” in which both parties could get a better outcome by communicating and cooperating?

e. Now suppose that each firm is thinking of opening new outlets in a number of towns, and each town has a payoff matrix similar to this one. Would there be advantages in having the two chains communicate and cooperate in this case? If they decide to collude, what form do you think their collusion might take?

 
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On January 1, 2005, a three-decades-old system of global quotas that had limited how much China and other countries could ship to the United States and other wealthy nations ended. Over the next four months, U.S. imports of Chinese-made cotton trousers rose by more than 1,505% and their price fell 21% in the first quarter of the year (Tracie Rozhon, “A Tangle in Textiles,” New York Times, April 21, 2005, C1). The U.S. textile industry demanded quick action, saying that 18 plants had already been forced to close that year and 16,600 textile and apparel jobs had been lost. The Bush administration reacted to the industry pressure. The United States (and Europe, which faced similar large increases in imports) pressed China to cut back its textile exports, threatening to restore quotas on Chinese exports or to take other actions. Illustrate what happened and show how the U.S. quota reimposed in May 2005 affected the equilibrium price and quantity in the United States.

 
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