The two firms -- Choco-Veg (CV) and Green Gold (GG) -- that currently produce chocolate-covered vegetables are each considering expanding their respective production capacities. Each must decide whether (or not) to make a costly investment in new facilities. The future annual profitability (in $ millions) of each company will depend on its own and the other’s actions, in the way that is depicted below (these figures are known by both, since they have been reported in The Chocoholic Weekly Review). The CEO of each firm cares only about maximizing her own company’s profits. Both have received MBAs from a highly ranked business school that is located in New York City.
1. Suppose that the two firms must make their decisions simultaneously and cannot communicate. What is the likely outcome? Explain.
2. Suppose instead that GG’s senior management could announce its (GG’s) decision first; or GG could instead announce that it was delaying its decision until CV announced its (CV’s) decision first. These are the only communications that are possible. Which announcement should GG make? Explain.
Part B. (20 minutes) Answer two (2) of the following questions. Indicate whether you agree or disagree, and explain why:
1. In a perfectly competitive (commodity) industry, price discrimination (market segmentation) is unlikely to occur.
2. The firms in oligopolistic industries are likely to earn high profits.
3. The struggle by companies in “high-tech” industries to establish technological standards that are favorable to themselves is a good example of the practical application of the insights that can be gained from the prisoner’s dilemma.