Question : 14.3   Sequential Games and Business Strategy 1) In a decision tree, : 1387885

14.3   Sequential Games and Business Strategy

1) In a decision tree, the difference between a decision node and a terminal node is that

A) at a decision node, all participants are free to make individual decisions, but at a terminal node, they must agree on a collective decision.

B) at a decision node, all participants make the same decision, while at a terminal node, different players may make different decisions.

C) at a decision node, a decision must be made, while a terminal node shows the payoff.

D) at a decision node, a decision must be made, while at a terminal node, the final decision must be made.

Figure 14-1

Assume that Lexus (L) is the first automobile company to produce a luxury class hybrid automobile and is the only such company for the past four years. BMW is now considering producing its own luxury hybrid automobile and Lexus must decide whether or not to lower the price of its luxury hybrid to counter BMW’s entry into the luxury hybrid niche.

2) Refer to Figure 14-1. Should Lexus lower its price in order to deter BMW’s entry into the luxury hybrid automobile market?

A) In terms of profit earned, it makes no difference whether Lexus lowers its price or not; in either case it will make $280 million profit if BMW enters.

B) No, it should keep the same price and work to capitalize on its brand loyalty.

C) Yes, it will drive BMW out of the market.

D) No, because BMW will enter the market regardless of Lexus’ decision about its price.

3) Refer to Figure 14-1.  If Lexus lowers its price, will this deter BMW from entering the market?

A) Yes, because BMW stands to lose $100 million if it competes with Lexus.

B) Yes, because BMW will make a smaller profit than Lexus if it chooses to compete.

C) No, because BMW will still make a profit of $120 if it competes with Lexus.

D) No, because BMW will be able to break Lexus’ first mover advantage.

4) In a subgame perfect equilibrium,

A) the first mover has an advantage over other players.

B) the last mover has an advantage over other players.

C) each player’s strategy constitutes a Nash equilibrium at every subgame of the original game.

D) each player has the same response as the others at every subgame of the tree.

Figure 14-2

The government of a developing country plans to award two firms, Gigacom and Xenophone, the exclusive rights to share the market for high speed Internet service. Gigacom and Xenophone can both provide the service either via television cable lines or via direct subscriber line (dbl). Suppose the government is considering a proposal to delay one firm’s entry into the market on the grounds that it wants to prevent “harmful” competition. Figure 14-2 shows the decision tree for this game.

5) Refer to Figure 14-2.  If the government delays Gigacom’s entry and Xenophone moves first, is a threat by Gigacom that it will provide DSL service if Gigacom provides cable service a credible threat?

A) No, because Gigacom will lose $4.5 million in profits if it carries out its threat.

B) Yes, because Gigacom’s DSL service will drive Xenophone out of business.

C) No, because as a second mover, it has no choice but to abide by the choices of the first mover.

D) Yes, Xenophone stands to lose $3 million in profit.

6) Refer to Figure 14-2.  If the government delays Gigacom’s entry and Xenophone moves first, what is the likely outcome in the market?

A) Both offer Internet service via cable line; Xenophone earns a profit of $6 million, and Gigacom earns a profit of $9 million.

B) Both offer DSL Internet service; Xenophone earns a profit of $8 million, and Gigacom earns a profit of $7 million.

C) Xenophone offers DSL Internet service and earns a profit of $5 million, while Gigacom offer Internet service via cable line and earns a profit of $6.5 million.

D) Xenophone offers Internet service via cable line and earns a profit of $4 million, while Gigacom offers DSL Internet service and earns a profit of $4.5 million.

7) Refer to Figure 14-2. Now suppose that the government delays Xenophone’s entry and Gigacom moves first, what is the likely outcome in the market?

A) Both offer Internet service via cable line; Xenophone earns a profit of $6 million, and Gigacom earns a profit of $9 million.

B) Both offer DSL Internet service; Xenophone earns a profit of $8 million, and Gigacom earns a profit of $7 million.

C) Xenophone offers DSL Internet service and earns a profit of $5 million, while Gigacom offer Internet service via cable line and earns a profit of $6.5 million.

D) Xenophone offers Internet service via cable line and earns a profit of $4 million, while Gigacom offers DSL Internet service and earns a profit of $4.5 million.