Question : Figure 14-5 A few years ago Netflix (N) pioneered an online : 1387887

Figure 14-5

A few years ago Netflix (N) pioneered an online DVD rental service. Blockbuster (B), a brick and mortar DVD/video rental company, waited until Netflix had been in business for over a year before deciding whether to establish its own online rental service. At this point, Netflix had to decide whether or not to lower its subscription price in order to deter Blockbuster’s entry into the market. Figure 14-5 shows the decision tree for the Netflix-Blockbuster entry game.

20) Refer to Figure 14-5.  If Netflix lowers its price will this deter Blockbuster from setting up an online DVD rental service?

A) Yes, because Blockbuster stands to lose $1 million if it competes with Netflix.

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

C) No, because Blockbuster will make a profit if it competes with Netflix.

D) No, because Blockbuster will make a larger profit than Netflix if it chooses to compete.

21) Refer to Figure 14-5.  Does it make sense for Netflix to lower its price in order to deter Blockbuster’s entry into the online DVD rental market?

A) Yes, because Netflix stands to make a profit of $7 million by lowering its price and keeping Blockbuster out of the market.

B) No, because Netflix will make a higher profit by keeping its subscription price unchanged, whether Blockbuster enters the market or not.

C) Yes, because it is always profitable to remain a monopoly.

D) No, because Blockbuster will enter the market regardless of Netflix’s decision about its subscription price.

22) What is a subgame?

A) It is one that begins at any node of the tree, including the game itself.

B) It is one that begins at any decision node of the tree except the first decision node.

C) It is one that starts at the final decision node of the tree.

D) It is a simultaneous game embedded in a sequential game.

23) Why are decision trees useful to managers who plan business strategies?

A) Decision trees explain the level of concentration in an industry.

B) Decision trees can be used to increase the amount of product differentiation; this enables managers to charge higher prices for their products.

C) Decision trees provide a systematic way of thinking through the implications of a strategy.

D) Using a decision tree always leads to a dominant strategy.

24) In a sequential game, one firm will act first and then other firms will respond.

25) Decision trees can only be used to analyze sequential games.

26) A subgame is a simultaneous game embedded in a sequential game.

27) A subgame-perfect equilibrium is a Nash equilibrium in which no player can make himself better off by changing his decision at any decision node.

28) The prisoner’s dilemma is used to analyze business situations in which one firm acts first and then other firms respond.

29) What is a sequential game? How are decision trees used to analyze sequential games?

30) Explain why selling output at a price below that at which marginal revenue equals marginal cost might serve to deter entry of a potential competitor.