4.05_micro

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Jan 9, 2024

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Brooke Linebaugh- Option 1- 11/20 Two major media streaming services, Intermovies, and Walter X, are considering whether to maintain or increase their monthly subscription rate. Since a significant percentage of their customers will sign up for a whole year, they will be unable to change their rates for at least a year once they set them. The relevant payoff matrix appears below for their daily profits. Walter X Maintain Increase Intermovies Maintain $1,200, $900 $900, $800 Increase $950, $1,150 $1,100, $1,000 (a) Does Walter X have a dominant strategy? Explain. Walter X has a dominant strategy to increase its monthly subscription rate. This is because regardless of Intermovies' choice, the payoff for Walter X is always higher when it increases the rate. Specifically, if Intermovies chooses to maintain the current rate, the payoff for Walter X will be $1,200, which is higher than the $900 payoff that Walter X would receive if Intermovies increases the rate. Similarly, if Intermovies chooses to increase the rate, the payoff for Walter X will be $1,150, which is still higher than the $1,100 payoff that Walter X would receive if Intermovies maintains the current rate. (b) Are Intermovies and Walter X likely to have many other competitors? Explain. It is highly unlikely that Intermovies and Walter X would face any significant competition in their market. This is because the media streaming services industry has high barriers to entry, such as high initial costs and complexities in establishing a foothold. These factors deter potential newcomers. In addition, the substantial investments required for infrastructure, content rights, and user acquisition make it challenging for new players to enter the market. These characteristics are reminiscent of a natural monopoly. Therefore, it can be inferred that Intermovies, and Walter X have a strong market position with limited direct competitors, owing to the barriers that make it difficult for other businesses to establish a foothold and effectively compete. (c) If Walter X decides to maintain its monthly subscription rate, what is the better price move for Intermovies? If Walter X decides to maintain its monthly subscription rate, the optimal strategy for Intermovies would be to also maintain its subscription rate. This strategic move aligns with the assumption that, if Walter X keeps its prices unchanged, it is likely that Intermovies' monthly subscription rate will remain the same as well. By maintaining the subscription rate in this scenario, Intermovies ensures that its prices are in line with those of its competitor, potentially avoiding a price war and allowing both companies to sustain profitability. While there is a risk that Walter X could choose to increase its monthly subscription rate, the likelihood of this happening, based on Walter X's decision to maintain, makes the Maintain option the better choice for Intermovies in this strategic context.

(d) What might preserve the supernormal profits of Intermovies and Walter X in the long run? To sustain their profits over time, Intermovies and Walter X can capitalize on the unique features of the media streaming market. With high entry costs and limited direct competition, a cooperative approach of consistently maintaining subscription prices becomes crucial. This strategy aligns with the market's stability, minimizing the risk of price wars. The inherent barriers make it tough for new players to enter, providing both companies a stable environment to ensure continued profitability through their shared commitment to pricing stability. e) The Nash Equilibrium=Point where a player (firm) has the highest possible payoff based on efficient prediction of the other player's reaction The highest payoff for a player in this game is where there is $1,200 Payoff combination to give Nash Equilibrium (1200, 900) under the (maintain, maintain) strategy for Intermovies and Walter X. That implies, at the Nash Equilibrium: Profit to Intermovies= $1,200 Profit to Walter X =$900 (g) What are Intermovies' and Walter X's dominant strategies (if any) after the tax? i. Intermovies: After the tax is considered, Intermovies has two options: maintain its current subscription rate or increase it. The former option yields a higher profit of $800, while the latter results in a profit of $700. Although neither option is a strictly dominant strategy, maintaining the subscription rate is the more strategically favorable choice. This creates a Nash equilibrium that maximizes Intermovies' profit, especially considering the likely response from Walter X. ii. Walter X: Walter X continues to follow its dominant strategy of sustaining the subscription rate even after the tax, as it offers a higher payoff of $1,100 compared to the $1,000 payoff when opting to increase the rate. Although there isn't a strictly dominant strategy, maintaining the subscription rate is still the best decision for Walter X, which ensures a superior profit outcome, especially when anticipating Intermovies' probable course of action. (h) If the firms do not cooperate after the tax and act simultaneously, what will their new profits be? If the firms do not cooperate and both Intermovies and Walter X act simultaneously, the Nash equilibrium occurs when both firms maintain their subscription prices. This resulted in net profits of $800 for Intermovies and $1,100 for Walter X. On the other hand, if both firms decide independently to increase prices, the net profits would be $700 for Intermovies and $1,000 for Walter X. These outcomes represent stable equilibria, as neither company has an incentive to unilaterally deviate from its chosen strategy. This emphasizes the importance of simultaneous decision-making in maximizing their respective profits in this competitive landscape.

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