Suppose there are no barriers to entry into the market for smartphones, and threatened competition from potential entrants forces both suppliers to set the prices that would apply under perfect competition.

(a) What price do both suppliers charge for smartphones?

(b) What are the quantities of smartphones produced and sold at the perfectly competitive equilibrium, and what profit do both suppliers earn?

(c) Comment on the comparison between the prices, quantities and profits under joint profit maximization, the Cournot–Nash equilibrium, the Stackelberg equilibrium, the Bertrand equilibrium, and the perfectly competitive equilibrium.

The following payoff matrix shows the profits to two firms, A and B, that need to decide whether to set a high or a low price for identical products produced by both firms:

Firm A is an established monopoly supplier of a particular product. Firm B is a supplier to a different market, and is considering a diversification strategy that involves entry into A’s market. Faced with the threat of entry from B, A must decide whether to accommodate B’s presence by cutting back its own output in the event that B does enter, or plan to fight a price war with B. If B does not enter, A earns a profit of 500 and B earns a profit of 300. If B enters and A decides to accommodate, A earns 200 and B earns 600. If A decides to fight B in a price war, both firms earn a profit of 100.

With reference to the sequential entry game described in Q2, before B decides whether or not to enter, A is presented with an opportunity to invest in an expansion of capacity. If A subsequently keeps the market to itself, or if A fights a price war with B, the investment will break even and A’s payoffs will be unaffected. If B enters and A accommodates by sharing the market with B, however, the investment will be loss-making, and A’s payoff will be reduced from 200 to 0.

You are given the following information, based on past observation of penalty kicks in football. 60% of penalties where a right-footed penalty-taker shot towards the left-hand side of the goal (his stronger side), and the goalkeeper dived to the same side, were successfully converted. 90% of penalties where a right-footed penalty-taker shot towards the left-hand side and the goalkeeper dived in the opposite direction were successfully converted. Where a right-footed penalty taker shot towards the right-hand side of the goal (his weaker side), 30% of penalties were successfully converted when the goalkeeper dived in the correct direction, and 80% were converted when the goalkeeper dived in the wrong direction.