Two home-improvement stores (Great Home and Super Home) in a growing urban area are interested in expanding their market
Posted: Mon Apr 18, 2022 9:12 am
Two home-improvement stores (Great Home and Super
Home) in a growing urban area are interested in expanding
their market share. Both are interested in expanding the size of
their store and parking lot to accommodate potential growth in
their customer base. Two possible actions for both the firms are:
‘increase the size of the store and parking lot’ and ‘do not
increase the size of the store and parking lot’. Payoffs are
defined in terms increase in annual profits in $million. The
following table describes the payoffs for both the firms to
alternative actions taken by each of them.]
Super Home
Increase
Do not increase
Great Home
Increase
Super Home = $1.0 million
Great Home = $1.5 million
Super Home = $0.4 million
Great Home = $3.4 million
Do not increase
Super Home = $3.2 million
Great Home = $0.6 million
Super Home = $2.00 million
Great Home= $2.5 million
a) Let’s say, each store is pursuing its own best interest. What
will be a rational (or dominant) strategy for Super Home to
follow? Explain in 3-4 sentences. What will be a rational (or
dominant) strategy for Great Home to follow?
b)What will be the annual profit growth for each store, if they
both follow their dominant strategy? What is a Nash equilibrium
here and why? (Find out the Nash equilibrium using the pay-off
matrix as shown above)
c)Suppose the owners of Super Home and Great Home meet for a
friendly game of golf one afternoon and happen to discuss a
strategy to optimize growth related profit. What should be the
joint strategy they should both agree to? What will be annual
profit growth for each store under this agreement?
Home) in a growing urban area are interested in expanding
their market share. Both are interested in expanding the size of
their store and parking lot to accommodate potential growth in
their customer base. Two possible actions for both the firms are:
‘increase the size of the store and parking lot’ and ‘do not
increase the size of the store and parking lot’. Payoffs are
defined in terms increase in annual profits in $million. The
following table describes the payoffs for both the firms to
alternative actions taken by each of them.]
Super Home
Increase
Do not increase
Great Home
Increase
Super Home = $1.0 million
Great Home = $1.5 million
Super Home = $0.4 million
Great Home = $3.4 million
Do not increase
Super Home = $3.2 million
Great Home = $0.6 million
Super Home = $2.00 million
Great Home= $2.5 million
a) Let’s say, each store is pursuing its own best interest. What
will be a rational (or dominant) strategy for Super Home to
follow? Explain in 3-4 sentences. What will be a rational (or
dominant) strategy for Great Home to follow?
b)What will be the annual profit growth for each store, if they
both follow their dominant strategy? What is a Nash equilibrium
here and why? (Find out the Nash equilibrium using the pay-off
matrix as shown above)
c)Suppose the owners of Super Home and Great Home meet for a
friendly game of golf one afternoon and happen to discuss a
strategy to optimize growth related profit. What should be the
joint strategy they should both agree to? What will be annual
profit growth for each store under this agreement?