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Category > Economics Posted 17 May 2017 My Price 10.00

Matchbox and Hot Wheels

There are two primary sellers of toy cars, Matchbox and Hot Wheels. Suppose there are 100
consumers, each of whom wishes to buy at most one car: a toy car is worth $5 to a consumer.
Half of the consumers are Matchbox fans; the other half are Hot Wheels fans. However,
fandom is fickle: a consumer will buy the cheapest car unless both cars are equally costly to the
consumer, in which case the consumer buys according to his fandom.
The marginal cost of producing a car is $1 for both firms. Matchbox chooses its price, and then
Hot Wheels chooses its price; afterwards, each consumer decides which car to buy, if any.
1. Predict Matchbox’s profits. Be sure to explain your reasoning.
2. Suppose now that Matchbox can issue coupons for a $1 rebate on its toys to its fans
(and only its fans). Determine an optimal pricing strategy for Matchbox. What are your
expected profits?
3. Suppose now that Hot Wheels can issue coupons for a $1 rebate to its fans after
Matchbox issues its own coupon (but before pricing decisions are made). Will Hot
Wheels wish to issue the coupon? Will Matchbox, anticipating Hot Wheels’ action,
decide to issue a coupon? What are the final expected profits and prices?
4. Explain intuitively how Matchbox and Hot Wheels are “differentiating” their product by
issuing these coupons.

Answers

SuperTutor
(15)
Status NEW Posted 17 May 2017 07:05 AM My Price 10.00

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