QUESTION
1 The manager of MTML is considering the possibility of entering the Mauritian Telecommunication Market, where there is only one firm operating, namely Mauritius Telecom (MT). The manager's decision will be based on the profitability of the market, which in turn heavily depends on how MT will react to the entry.
MT could be accommodating and let MTML grab his share of the market or she could respond aggressively, meeting MTML with a cut-throat price war. Another factor that affects the revenue stream is the investment level of MTML. The manager of MTML may invest to the latest technology (i.e. wireless network) and lower his operating costs (low cost case) or he may go ahead with the existing technology (i.e. lines and wires) and have higher operating costs (high cost case). The manager estimates that if MTML enters the market and MT reacts aggressively, the total losses will be Rs. 7 million in low cost case and Rs. 10 million in high cost case. If MT accommodates, however, MTML will enjoy a profit of $6 million in low cost case and $4 million in high cost case.
Suppose the manager of MTML thinks that there is an equal chance of facing an aggressive and an accommodating reaction from MT. Draw a sequential game tree to study the above problem as a decision analysis.
2 Now suppose, the best outcome for MT is when she is the only one in the market. In this case, she would make a profit of, say $15 million. If MT chooses to be accommodating, her profits would be $10 if MTML enters with the existing technology, i.e., high cost case, and $8 million if MTML enters with the latest technology, i.e., low cost case. If MT chooses to be aggressive, her profits would be $3 and $1 million, respectively.
(i) Using the new information, draw a new sequential game tree.
(ii) Solve the game using backward induction, explaining clearly the dominant strategies and the Nash equilibrium.
(iii) Discuss the extent to which the Nash equilibrium is beneficial to MT in the medium or longer term.