Suppose two bars, “the Last Jar” and “Prince Alfred”, can choose to sell a pint of beer for either $10 or $12. For simplicity, assume that: these are the only two possible prices; there are no costs (e.g., there is no cost for obtaining and serving the beer), and each customer drinks exactly one pint of beer. There are two types of customers: professors and students. Professors are not price-sensitive and go to the bar closest to their department’s building. Thus, 50 professors from the Melbourne School of Engineering go to Prince Alfred, while 50 professors from the Melbourne Graduate School of Education go to the Last Jar. Meanwhile, the students, who are 200 in total, are price sensitive. They go to the bar with the lowest price –or, if both bars charge the same price, then they split evenly. Sequential game: a) Suppose the Last Jar chooses what price to set first. Then, after observing the price set by the Last Jar, Price Alfred chooses what price to set. Draw the extensive form game and find the subgame perfect Nash equilibrium (SPNE). b) Does this sequential game have a first or a second mover advantage? Justify your answer.
Suppose two bars, “the Last Jar” and “Prince Alfred”, can choose to sell a pint of beer for either $10 or $12. For simplicity, assume that: these are the only two possible prices; there are no costs (e.g., there is no cost for obtaining and serving the beer), and each customer drinks exactly one pint of beer. There are two types of customers: professors and students. Professors are not
Sequential game:
a) Suppose the Last Jar chooses what price to set first. Then, after observing the price set by the Last Jar, Price Alfred chooses what price to set. Draw the extensive form game and find the subgame perfect Nash equilibrium (SPNE).
b) Does this sequential game have a first or a second mover advantage? Justify your answer.
Step by step
Solved in 2 steps with 2 images
