Overview
PART ONE:
A monopolist can charge any price they like for their product and it will sell.
Evaluate the above statement. Is it true? If so, how do you know? Is the above statement false? If so, why? In your answer, be sure to also explain what a monopolist is (what are the defining characteristics, etc).
PART TWO:
Google and Yahoo! are two large search engine companies. Combined, these companies control a large market share in the search engine industry. Both companies currently advertise their search engines on television, and each company earns a profit of $550 million. If both companies were to stop advertising on television, each would earn a profit of $600 million. If only one company were to stop advertising on television and the other company continued to do so, the company that stopped advertising would earn a profit of $200 million and the company that continued to advertise would earn a profit of $800 million. Assume this is a simultaneous-move game where Google and Yahoo! choose to advertise or choose not to advertise, and Google and Yahoo! cannot collude.
a. What is a payoff matrix? Explain this concept in your own words and explain why it is used in game theory.
b. Does Google have a dominant strategy? If so, how did you find this strategy? (In other words, write a short description about your process of verifying this dominant strategy). In your response be sure to define a dominant strategy in your own words.