The New York Times reports that Wal-Mart has decided to challenge Netflix and enter the online DVD-by-mail market. Because of economies of scale, Wal-Mart has a slight cost advantage relative to Netflix. Wal-Mart is considering the use of a limit pricing strategy. It can enter the market by matching Netflix on price. If it does, and Netflix maintains its price, then both firms would earn $5 million. But if Netflix drops its price in response, Wal-Mart would have to follow and would earn $2 million; Netflix would earn $3 million. Or Wal-Mart could enter the market with a price that is below Netflix's current price but above its marginal cost. If it does, Netflix would make one of two moves. It could reduce its price to below that of Wal-Mart. If it does, Wal-Mart will earn a profit of $0, and Netflix will earn a profit of $2 mil- lion. Or Netflix could keep its present price. If Netflix keeps its present price, Wal-Mart can keep its present price and earn $6 million (while Netflix earns $4 million). Or Wal-Mart can increase its price and earn $2 mil- lion while Netflix earns $6 million Make sure that you can draw the extensive form of this game. Note that Walmart's payoff appears first. Maintain price (high price) (5, 5) Netflix Match Netflix (high price) Wal-Mart Drop price (2, 3) Match Netflix (low price) Wal-Mart Drop price (low price) (0, 2) Drop price (low price) Maintain price (6, 4) (low price) Netflix Wal-Mart Maintain price (high price) Increase price (high price) (2, 6) Using backward induction determine Walmart's pricing strategy, given Netflix's expected strategies. Which of the following is the likely outcome. а. Walmart matches Netflix high price when Walmart enters, Netflix maintains high price (W, $5M and N, $5M) O b. Walmart matches Netflix high price when Walmart enters, Netflix drops price and Walmart matches Netflix low price (W, $2M and N, $3M) Walmart drops price when Walmart enters and Netflix drops price (W, $0M and N, $2M) d. Walmart drops price when Walmart enters, Netflix maintains price and Walmart maintains price (W, $6M and N, $4M) Walmart drops price when Walmart enters, Netflix maintains price and Walmart increases price (W, $2M and N, $6M) O O
The New York Times reports that Wal-Mart has decided to challenge Netflix and enter the online DVD-by-mail market. Because of economies of scale, Wal-Mart has a slight cost advantage relative to Netflix. Wal-Mart is considering the use of a limit pricing strategy. It can enter the market by matching Netflix on price. If it does, and Netflix maintains its price, then both firms would earn $5 million. But if Netflix drops its price in response, Wal-Mart would have to follow and would earn $2 million; Netflix would earn $3 million. Or Wal-Mart could enter the market with a price that is below Netflix's current price but above its marginal cost. If it does, Netflix would make one of two moves. It could reduce its price to below that of Wal-Mart. If it does, Wal-Mart will earn a profit of $0, and Netflix will earn a profit of $2 mil- lion. Or Netflix could keep its present price. If Netflix keeps its present price, Wal-Mart can keep its present price and earn $6 million (while Netflix earns $4 million). Or Wal-Mart can increase its price and earn $2 mil- lion while Netflix earns $6 million Make sure that you can draw the extensive form of this game. Note that Walmart's payoff appears first. Maintain price (high price) (5, 5) Netflix Match Netflix (high price) Wal-Mart Drop price (2, 3) Match Netflix (low price) Wal-Mart Drop price (low price) (0, 2) Drop price (low price) Maintain price (6, 4) (low price) Netflix Wal-Mart Maintain price (high price) Increase price (high price) (2, 6) Using backward induction determine Walmart's pricing strategy, given Netflix's expected strategies. Which of the following is the likely outcome. а. Walmart matches Netflix high price when Walmart enters, Netflix maintains high price (W, $5M and N, $5M) O b. Walmart matches Netflix high price when Walmart enters, Netflix drops price and Walmart matches Netflix low price (W, $2M and N, $3M) Walmart drops price when Walmart enters and Netflix drops price (W, $0M and N, $2M) d. Walmart drops price when Walmart enters, Netflix maintains price and Walmart maintains price (W, $6M and N, $4M) Walmart drops price when Walmart enters, Netflix maintains price and Walmart increases price (W, $2M and N, $6M) O O
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:The New York Times reports that Wal-Mart has decided to challenge Netflix and enter the online DVD-by-mail market. Because of economies of scale, Wal-Mart has a slight cost
advantage relative to Netflix. Wal-Mart is considering the use of a limit pricing strategy. It can enter the market by matching Netflix on price. If it does, and Netflix maintains its price,
then both firms would earn $5 million. But if Netflix drops its price in response, Wal-Mart would have to follow and would earn $2 million; Netflix would earn $3 million. Or Wal-Mart
could enter the market with a price that is below Netflix's current price but above its marginal cost. If it does, Netflix would make one of two moves. It could reduce its price to below that
of Wal-Mart. If it does, Wal-Mart will earn a profit of $0, and Netflix will earn a profit of $2 mil- lion. Or Netflix could keep its present price. If Netflix keeps its present price, Wal-Mart
can keep its present price and earn $6 million (while Netflix earns $4 million). Or Wal-Mart can increase its price and earn $2 mil- lion while Netflix earns $6 million
Make sure that you can draw the extensive form of this game. Note that Walmart's payoff appears first.
Maintain price
(high price)
(5, 5)
Netflix
Match Netflix
(high price)
Wal-Mart
Drop price
(2, 3)
Match Netflix
(low price)
Wal-Mart
Drop price
(low price)
(0, 2)
Drop price
(low price)
Maintain price
(6, 4)
(low price)
Netflix
Wal-Mart
Maintain price
(high price)
Increase price
(high price)
(2, 6)
Using backward induction determine Walmart's pricing strategy, given Netflix's expected strategies. Which of the following is the likely outcome.
а.
Walmart matches Netflix high price when Walmart enters, Netflix maintains high price (W, $5M and N, $5M)
O b.
Walmart matches Netflix high price when Walmart enters, Netflix drops price and Walmart matches Netflix low price (W, $2M and N, $3M)
Walmart drops price when Walmart enters and Netflix drops price (W, $0M and N, $2M)
d.
Walmart drops price when Walmart enters, Netflix maintains price and Walmart maintains price (W, $6M and N, $4M)
Walmart drops price when Walmart enters, Netflix maintains price and Walmart increases price (W, $2M and N, $6M)
O O
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 1 images
Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education