Assignment: Game Theory And Strategic Behavior
Required Resources
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Read the following chapters in: Managerial Economics:
Chapter 11: Non-Price competition
Chapter 12: The economics of Competitive Strategy
Game Theory and Strategic Behavior
Suppose that GE is trying to prevent Maytag from entering the market for high efficiency clothes dryers. Even though high efficiency dryers are more costly to produce, they are also more profitable as they command sufficiently higher prices from consumers. The following payoffs table shows the annual profits for GE and Maytag for the advertising spending and entry decisions that they are facing.
GE
MAYTAG
Advertising = $12m
Advertising = $0.7m
Stay Out
$0, $30m
$0, $35m
Enter
$1m , $20m
$12m, $15
Based on this information, can GE successfully prevent Maytag from entering this market by increasing its advertising levels? What is the equilibrium outcome in this game?
Suppose that an analyst at GE is convinced that just a little bit more advertising by GE, say another $2m, would be sufficient to deter enough customers from buying Maytag, thus, yield less than $0 profits for Maytag in the event it enters. Suppose that spending an extra $2m on advertising by GE will reduce its expected profits by $1.5 m, regardless of whether Maytag enters or stays out. Would this additional spending on advertising achieve the effect of deterring Maytag from entering? Should GE pursue this option?
Guided Response: In 300 words or more, provide your response to the above discussion question. Show all your calculations and explain your responses. Substantive responses use theory, research, and experience or examples to support ideas and further the class knowledge on the discussion topic.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.