Question 1:
In Managerial Economics we consider a sequential-move game in which an entrant is considering entering an industry in competition with an incumbent firm. There are several possibilities of how this sequential game will be played. We want to use the Froeb rule of “look ahead and reason back.”
Also see the help provided in the discussion preparation.
https://mru.org/courses/great-economists-classical-economics-and-its-forerunners/cournot
For your discussion post, use Figure 15-1 from the textbook as your starting point to address the following:
Play and analyze the game. Can, and how does, the entrant succeed? Is the incumbent ever in control of this game? What is the Nash equilibrium?
You may wish to review the old game known as Duopoly, as well as Antoine-Augustin Cournot, to help inform your post.
Question 2:
Context
Asymmetric information and/or imperfect information can cause two forms of market failure: 1) adverse selection and 2) moral hazard. Asymmetric information is where one party in the transaction has more information than the other party in the transaction. Imperfect information is a situation in which neither party has perfect information about the good/service being exchanged in a transaction. Such goods and services are sometime referred to as “experience goods.”
In the late 1990s, car leasing was very popular in the United States. A customer would lease a car from the manufacturer for a set term, usually two years, and then have the option of keeping the car. If the customer decided to keep the car, the customer would pay a price to the manufacturer, the “residual value,” computed as 60% of the new car price. The manufacturer would then sell the returned cars at auction. In 1999, the manufacturer lost an average of $480 on each returned car. (The auction price was, on average, $480 less than the residual value.)
Also see the help provided in the discussion preparation.
https://www.wsj.com/video/corporate-decision-making-is-hindsight-2020/E683F666-180B-4730-874A-41699C88F20F.html
Instructions
For your discussion post, address the following within the context of the above scenario:
Why was the manufacturer losing money on this program? Was this a problem of adverse selection or moral hazard?
What should the manufacturer do to stop losing money? Will rational actors use rules of thumb?
