Please refer to the attached for Question 3

(a) (i) Merebut and Ichiban provide private-hire services. The strategic choices

and payoffs for Merebut and Ichiban are as follows:

Payoffs:

Merebut, Ichiban Ichiban’s Strategy

Merebut’s Strategy Cut Prices Don’t Cut Prices

Cut Prices -$200, -$200 $400, $500

Don’t Cut Prices $300, $650 $500, $600

If Merebut and Ichiban choose simultaneously and with full knowledge

of the payoff structure, what is the Nash Equilibrium/Equilibria, if any?

Explain your answer.

(5 marks)

(ii) Consider the game given in Question 3(a)(i). Suppose Merebut chooses

its strategy first, followed by Ichiban. Draw the extensive form, or game

tree, of this sequential game.

(5 marks)

(iii) Analyse and solve for the extensive form Nash Equilibrium in the

sequential game where Merebut goes first.

(iv) Suppose that the right to move first is auctioned to the highest bidder.

The highest bidder can move first; the lower bidder must move second.

Which firm would bid more in the auction, and what price would they

be willing to bid up to? Why?

Note: If you are not confident of your earlier answers, describe the

general principle determining the value of moving first, for partial mark.

(5 marks)

(b) Is the private-hire market best modelled using the Bertrand (price) competition

model, or the Cournot (quantity) competition model? What are the implications

of the model you chose on prices and profits? Do not use Question 3(a) to

answer this. You must provide a real-life argument to answer this question.

(5 marks)