Application:The Sale of Axon Marble's B PlantAxon Marble Company had been approached by a firm that wanted to acquire Axon's B plant, thesmaller of two marble plants. The B plant was currently idle. The prospective buyer had no interest inthe marble business and planned to tear down the plant and use the land for other purposes. It wasgenerally believed that the buyer is unlikely to pay very much.Alex Karp, head of Axon Marble Company's Strategic Planning Group, asked Joel Garner, a recentgraduate from business school, to prepare a preliminary assessment of the sale for the nextmorning's planning group meeting. Joel was pleased to be asked to take on this assignment but wasconcerned that the time frame would put a significant limitation on the amount of information hecould collect to support the analysis.Joel knew the following facts:Axon had an 8,000-ton per year plant and a smaller 2,000-ton plant. The smaller plant wascurrently idle. Axon's only competitor was Archer, which operated a single 20,000-ton plant.●At current prices there was significant over capacity. Over the last five years each firm hadbeen producing at 50% of total capacity (Archer at 10,000 tons and Axon at 5,000 tons). Therewas no significant difference in the quality of the marble from any of the plants, and all threeplants were equally efficient. Relative to variable costs, fixed costs were negligible. The currentmarket price for marble was $5 million (U.S.) for each thousand tons of marble sold. Variablecosts were $2 million per thousand tons.Marketing had indicated that lowering the price to $4 million for each thousand tons while theother firm maintained its price at $5 million would likely shift half of the other firm's demandto the firm with the lower price. If both firms lowered the price to $4 million, each wouldmaintain its original share of overall demand. Axon's marketing team believed that themarketers at Archer held the same view. Unfortunately, Axon's marketing was unable tocommit to an estimate of how much overall demand would change with a lower price.Based on this information about demand responsiveness, cost, and capacity, Joel made a numberof profit calculations, which are summarized in Tables A and B. For the purposes of his initialcalculation he assumed no overall demand increase with lower price.Table A Profit Implications of Various Pricing Actions in Current SituationAxon($ million)Archer($ million)Current ($5 million) pricing15.03020.015Axon lowers to $4 million and Archer maintains priceArcher lowers to $4 million and Axon maintains priceBoth lower price7.52510.020 Table B Profit Implications of Various Pricing Actions after SaleArcherAxon($ million)($ million)Current ($5 million) pricing15.03016.021Axon lowers to $4 million and Archer maintains priceArcher lowers to $4 million and Axon maintains priceBoth lower price7.52510.020Axon's B plant had not been run for a few years and, while there were disagreements within thefirm about what to do with the plant, few now believed that overall demand for marble in this regionwas likely to increase. At first, Joel thought that it was only necessary to determine an appropriatemarket value for the plant and the land. But when Joel asked some of the more experiencedmembers of the planning group why the plant had not been previously sold, he was told that thecapacity might have played a role in pricing dynamics. Despite chronic overcapacity in the industry,pricing had been remarkably stable. Each company currently had market shares in direct proportion toits capacity. Joel wondered if the sale of this idle plant would impact the price of marble or Axon'sshare of the market.To get at the 'sale' question, Joel was convinced that he had to understand more about pricingdynamics in the industry. Perhaps game theory could be of use.a. Formulate the problem you need to solve. Explain.b. Identify the key elements of this strategic interaction as explained in the class. Explain.c. Who are the players? Explain.d. What are the actions available to the players and what is the timing associated with those actions?State the information accessible to each player. Explain.e.f. Identify the strategies for each player. Explain.g. Clearly write down the payoffs for each player in matrix form assuming a simultaneous move one-shot interaction. Explain.h. Consider the case where Axon sells its plant.i.Solve the problem using iterated elimination of dominated strategies? Refer to and applythe assumption of common knowledge of rationality.ii.Identify the Nash Equilibrium/Equilibria? Explain.Why is Archer willing to maintain its price even if it expects Axon to lower its price? (Hint:Refer to Axon's price elasticity of demand and its capacity). Explain.iv.What is a commitment device in game theory? Identify the commitment by Axon to notsteal the entire demand of Archer. Is this commitment credible? Explain.V.Suppose Archer could observe Axon's price and could change its price. Should it do so?Consider the case where Axon does not sell its plant.i.i.Identify the Nash Equilibrium/Equilibria. Explainii.How can Axon achieve the equilibrium where Axon and Archer both maintain their prices?2

Pricing dynamics : Pricing dynamics refers to the patterns and factors that influence changes in…

Table B Profit Implications of Various Pricing Actions after Sale Current ($5 million) pricing Axon lowers to $4 million and Archer maintains price Archer lowers to $4 million and Axon maintains price Both lower price Axon ($ million) 15.0 16.0 7.5 10.0 Archer ($ million) 30 21 25 20 Axon's B plant had not been run for a few years and, while there were disagreements within the firm about what to do with the plant, few now believed that overall demand for marble in this region was likely to increase. At first, Joel thought that it was only necessary to determine an appropriate market value for the plant and the land. But when Joel asked some of the more experienced members of the planning group why the plant had not been previously sold, he was told that the capacity might have played a role in pricing dynamics. Despite chronic overcapacity in the industry, pricing had been remarkably stable. Each company currently had market shares in direct proportion to its capacity. Joel wondered if the sale of this idle plant would impact the price of marble or Axon's share of the market. To get at the 'sale' question, Joel was convinced that he had to understand more about pricing dynamics in the industry. Perhaps game theory could be of use. a. Formulate the problem you need to solve. Explain. b. Identify the key elements of this strategic interaction as explained in the class. Explain. c. Who are the players? Explain.

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC