**Game Theory Scenario: Pharmacy Market Entry****Text Description:**Suppose Eckerd Pharmacy is the only pharmacy in a particular market, but CVS Pharmacy is thinking about entering the market. Absent entry, Eckerd Pharmacy can maximize profits by producing a small quantity. However, by producing a large quantity, Eckerd Pharmacy can attempt to deter entry by reducing prices and, consequently, profits.Eckerd Pharmacy must choose how much to produce first and then CVS Pharmacy will choose whether to enter the industry. The strategies and corresponding profits for Eckerd (E) and CVS Pharmacy (C) are depicted in the decision tree to the right. What is the Nash equilibrium of the game?**Options:**- **A.** Eckerd Pharmacy will choose the small quantity and CVS Pharmacy will not enter.- **B.** Eckerd Pharmacy will choose the large quantity and CVS Pharmacy will not enter.- **C.** Eckerd Pharmacy will choose the large quantity and CVS Pharmacy will enter.- **D.** Eckerd Pharmacy will choose the small quantity and CVS Pharmacy will enter.**Decision Tree Explanation:**The decision tree has the following nodes and outcomes:1. **Eckerd's Decision:** - **Small Quantity**: - If CVS enters: - Profit for E: $47, Profit for C: $47. - If CVS stays out: - Profit for E: $85, Profit for C: $0. - **Large Quantity**: - If CVS enters: - Profit for E: $0, Profit for C: -$10. - If CVS stays out: - Profit for E: $65, Profit for C: $0.The tree illustrates the possible outcomes based on the production quantity chosen by Eckerd and the subsequent decision by CVS to enter or stay out of the market. The profits for each scenario are shown in the decision tree.

We are going to use first mover advantage concept to answer this question.

Suppose Eckerd Pharmacy is the only pharmacy in a particular market, but CVS Pharmacy is thinking about entering the market. Absent entry, Eckerd Pharmacy can maximize profits by producing a small quantity. However, by producing a large quantity, Eckerd Pharmacy can attempt to deter entry by reducing prices and, consequently, profits. Enter E: $47 C: $47 Eckerd Pharmacy must choose how much to produce first and then cVS Pharmacy will choose whether to enter the industry. The strategies and corresponding profits for Eckerd (E) and cVS Pharmacy (C) are depicted in the decision tree to the right. What is the Nash equilibrium of the game? Small Quantity E: $85 C: $0 Stay Out! O A. Eckerd Pharmacy will choose the small quantity and CVS Pharmacy will not enter. Enter E: $0 C: -$10 Large Quantity O B. Eckerd Pharmacy will choose the large quantity and CVS Pharmacy will not enter. E: $65 OC. Eckerd Pharmacy will choose the large quantity and CVS Pharmacy will Stay Out C: $0 enter. O D. Eckerd Pharmacy will choose the small quantity and CVS Pharmacy will enter.

Suppose Eckerd Pharmacy is the only pharmacy in a particular market, but CVS Pharmacy is thinking about entering the market. Absent entry, Eckerd Pharmacy can maximize profits by producing a small quantity. However, by producing a large quantity, Eckerd Pharmacy can attempt to deter entry by reducing prices and, consequently, profits. Enter E: $47 C: $47 Eckerd Pharmacy must choose how much to produce first and then cVS Pharmacy will choose whether to enter the industry. The strategies and corresponding profits for Eckerd (E) and cVS Pharmacy (C) are depicted in the decision tree to the right. What is the Nash equilibrium of the game? Small Quantity E: $85 C: $0 Stay Out! O A. Eckerd Pharmacy will choose the small quantity and CVS Pharmacy will not enter. Enter E: $0 C: -$10 Large Quantity O B. Eckerd Pharmacy will choose the large quantity and CVS Pharmacy will not enter. E: $65 OC. Eckerd Pharmacy will choose the large quantity and CVS Pharmacy will Stay Out C: $0 enter. O D. Eckerd Pharmacy will choose the small quantity and CVS Pharmacy will enter.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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