27 May ECON Expert
- If profits are rampant in the oil industry, why aren’t companies outside the oil industry entering? How is this different from profits in the fast food or hay farming business?
- Assume that Hewlett-Packard (H-P) and Dell Computer have a large inventory of personal computers that they would like to sell before a new generation of faster, cheaper machines is introduced. Assume that the question facing each competitor is whether or not they should widely advertise a “close out” sale on these discontinued items, or instead let excess inventory work itself off over the next few months. If both aggressively promote their products with a nationwide advertising campaign, each will earn profits of $5 million. If one advertises while the other does not, the firm that advertises will earn $20 million, while the one that does not advertise will earn $2 million. If neither advertises, both will earn $10 million. Assume this is a one-shot game, and both firms seek to maximize profits. What is the dominant strategy for each firm? Are these also secure strategies?
Dell Computer
H-P
Promotion Strategy
Advertise
(“Left”)
Don’t Advertise
(“Right”)
Advertise
(“Up”)
$5 million, $5 million
$20 million,
$2 million
Don’t advertise
(“Down”)
$2 million, $20 million
$10 million,
$10 million
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